2. The static standards or norms toward which these prices tend are fixed in the same way as are other static standards of value,—by a rule of cost,—though in the case of railroads the working of this rule is exceptional.
3. When carrying is done by simple means and by competing carriers, the ultimate basis of charges is the cost of the carrying; and this is estimated in the simple way in which, under perfectly free competition, the cost of making commodities is estimated. The total outlay is charged against the total product.
4. A single railroad between one point and another, when it is not affected by the rivalry of any other railroad, can get for its service the difference between the cost of goods at the place where they are made and the cost at the point of delivery, on the supposition that they would either be made at this point or carried thither by more primitive means. Under such a partial monopoly the costs incurred by the railroad itself do not directly set the standard of its charges, but other costs do so.
5. In this case the so-called variable costs incurred by the railroad furnish a minimum limit below which its charges cannot go, but to which they tend to go in the case of traffic which cannot otherwise be secured.
6. This place value which the railroad can confer on the goods is small (1) when the cost of making the goods at their place of departure is not much less than that of making them at their place of destination, or (2) when it is not much less than the cost of obtaining them from a third point, or (3) when it is possible to carry them from the place of their origin to their destination by water or by any other cheap means of transportation.
7. Variable costs are positive additions to the total outlays previously incurred by a railroad, and they result from adding a definite amount to its previous traffic. They are less than proportionate parts of total costs, including interest, some part of operating expenses, cost of maintenance of roadway, etc.
8. The comparative smallness of the variable costs is chiefly due to the fact that the carrying capacity of railroads is only partially used. These costs become relatively larger as traffic increases, and would practically coincide with proportionate shares of total costs if the traffic should reach its absolute maximum.
9. If the place value above defined is large enough to cover the variable costs attaching to certain traffic and afford any surplus whatever, the railroad usually takes this traffic.
10. On the business which it gets the charges vary widely and, as it appears, capriciously, but they are at bottom governed by the economic principle stated—that of place value as established in ways in which the charges of the railroad itself do not figure.
11. Competing railroads tend to bring rates downward toward a minimum which is fixed by the merely variable costs of the carrying as done by one or more of the railroads themselves.