Privately Owned Railways’ Cost Function, Organization Size and Ownership

Abstract

This paper aims to find the optimal size of an urban private rail organization as well as to evaluate cost difference by ownership. First, after selecting privately owned rail companies, we explore explanatory variables which affect the cost of rail service. Second, keeping in mind previous cost studies of the urban passenger rail industry, we estimate variable cost function with the translog cost function and we construct the total cost function. Third, based on the average cost function, conditions are pinpointed which attain minimum average cost. Finally, based on estimated results, we calculate the size of an urban private rail company and the ownership effects on cost. We conclude that optimal size is about 231 million vehicle-km per year, with a network of 63.8 km length. In terms of total costs, public railways have higher costs than private railways. There is no cost difference, however, in terms of variable costs.