Welfare Economic Principles of (Urban) Rail Network Pricing: First-Best and Second-Best Solutions

Abstract

The purpose of this chapter is to rectify the at best unprofessional intermingling of objectives and constraints and present a proper theory of first-best and second-best pricing in urban rail networks. First, in view of the flaws of both Dupuit's – though nevertheless ingenious idea of – consumer surplus as well its cannibalized version found in most of today's economics textbooks, a proper definition of economic welfare resting on Hicks'sian variations instead is provided. It is used to derive efficient pricing rules that are subsequently applied to specific questions arising from running an urban railway network such as overcrowding, short-run versus long-run capacity or competing modes of transport like the private motor car. At the same time, another look is taken at economic costs, and in particular economic marginal costs, differing from commercial or accounting costs. Among other things, it is shown that even with commercial marginal costs being constant first-best pricing might not necessarily be incompatible with a zero-profit budget.