The effects of the privatisation of

British Rail
Economic Policy – Micro
History of British
Railways
 Before British Railways were formed in
1947, there were 4 major rail companies;
the Great Western Railway (GWR), the
London, Midland and Scottish Railway
(LMS), the London and North Eastern
Railway (LNER) and the Southern
Railway (SR).
 After World War II these were all
nationalised under the Transport Act 1947.
 British Railways was the operator of most
of the rail transport in Great Britain
between 1948 and 1997.
 Privatisation began in the late 1980s,
when the then British government
undertook a major restructuring schedule
to reduce the amount of subsidies required
from the government.
British Railways prior to
privatisation
The railway was less efficient.
Thousands of miles of
abandoned tracks.
Between 1950 and 1990, total
passenger traffic had fallen
from 17% to just 5%. Whilst
rail freight had suffered a
greater decline from 40% to
just 7%.

British Railways prior to privatisation cont.
 Section 39 of the 1968 Transport
Act introduced the first
government subsidies for railways
which, though unprofitable, were
deemed socially necessary.
 However, by 1985/86 the level of
subsidy had reached £1.6bn
compared to £600 in 1968 Figure 1. Passenger Travel Market Share (by
(1999/00 prices) mode)

 In 1992 the Conservative

government realised a White Paper
entitled ‘New Opportunities for the
Railways’

The details of
privatisation
 Prior to the privatisation of the
railways in 1993 the
Government had already been
busy selling many of British
Rails non-core operations.
 The railways act 1993
 Passenger rail services were
franchised, and the railway track
and signalling company
Railtrack was later floated on the
stock exchange.
The details of privatisation cont.
 The railways were a state owned
amenity.
 When privatised the barriers to
entry decreased.
 Therefore it was easier for other
firms to enter the market.
 Rent dissipation
• The shaded area shows the rent
that would be earned by the
government before privatisation.
• When another firm enters the rail
industry Q the labour
L1
decreases for that firm from L1
to L2 and increases average
output.
• This will decrease the firms rent as
cost of labour will increase.
• Causing rent dissipation

• If more and more firms enter the

rail industry the rent area becomes
smaller until it reaches 0.
Coase Therum
Criticisms of privatisation
Externalities arise such as pollution.
Wages for the workers may decrease as
supply of workers will increase therefore
according to the supply and demand
diagram wages will fall.
As the companies became more efficient
after privatisation redundancies were
made.
Railway infrastructure subject to the
need to make profits for shareholders
was a mistake, and led to under-
investment.
In 2001, the UK government decided to
bring Railtrack under administrative
supervision. A new, not-for-profit
company Network Rail was set up.
References
 Pollitt M.G.; Smith A.S.J. 2002 – “The restructuring and Privatisation
of British Rail: Was it Really that Bad?”
 Weizsäcker E.U.; Young O.R.; Finger M. 2005 – “Limits to
Privatization: How to Avoid Too Much of a Good Thing: A Report to
the Club of Rome”