XII. RAILROAD RATES
Transportation charges have such a general and vital relation to industrial and social welfare that the problem of the just and equitable distribution of their assessment is one of paramount economic and political consequence. A consideration of the main factors which influence the railway companies in fixing charges should precede a discussion of the regulation of transportation by the government.
GENERAL FACTORS WHICH DETERMINE RAILROAD RATES AND FARES
The factors which have most weight in fixing schedules of rates and fares are what it will cost to perform the several services, what the services are worth to those for whom they are to be rendered, and the extent to which there is competition among rival carriers to secure the traffic concerned. Though on the face of things it would seem that the railways should fix the charges for their various services in accordance with the costs of performing those services, it is neither practicable for them to do so nor is it desirable from the standpoint of public welfare that such a criterion should be adopted. It is impracticable for the railroads to base their charges upon cost of service, because it is impossible to determine accurately the elements which enter into the cost of performing the particular transportation service. The modern railroad is a very complex mechanism, employed in the performance of a multitude of different services. No railroad official is able to say just how much of the company's total expenses are to be charged against any one particular freight or passenger service.
The cost of service would be an undesirable basis of rates, because the railroads would derive such a small part of their total necessary revenues from the carriage of goods having a high value in proportion to bulk and weight, that they would be obliged to charge much higher rates than they now do upon the cruder products of the farm, forest, and mine. These products are the basic materials of industry, and the lowest possible rate for their transportation is essential to social and economic progress.
VALUE OF SERVICE AND VALUE OF COMMODITIES
Value of service is a more desirable basis for rates and fares than cost of service. By charging according to value of service is meant that the shippers of commodities and the passengers who travel shall contribute to the railroad's aggregate expenses in proportion to the value which they derive from the transportation service. The rates and fares may cover a part or all of the value of the service obtained. In either case they are fixed with reference to that value and not with regard to the cost involved in performing the work of transportation. The levy of rates and fares in accordance with this theory, which is usually called "charging what the traffic will bear," is considered by most people to distribute transportation charges properly, because it is claimed that the true measure of a shipper's or a passenger's ability to pay for a desired service is the value which he will thereby derive. That this theory, nevertheless, does not afford an altogether satisfactory basis of charges, particularly in the freight traffic, may be readily shown.
While it is true that the amount of value added by transportation to goods of low value is less for each unit of weight or bulk than the amount of value which is acquired by an equal weight or bulk of high-priced commodities, yet the percentage increase in value is greater in the case of the goods of low cost. Expensive articles can be carried long distances without adding very much to their cost to the consumers. Measured in their percentages, then, the value of the service of transportation is relatively much lower in the case of the higher-priced commodities. The freight charges on wheat range from twenty to forty per cent. of its farm value, while the rate on shoes is possibly two per cent. of their factory price. That these charges are levied in accordance with the real ability of the articles to pay would be hard to establish.
A PARTIAL THEORY OF RAILROAD FREIGHT RATES
Without attempting in this connection to formulate a complete theory of freight rates, it may be said that there are three factors to which weight should be given in fixing charges: First, the cost of service. The total costs of transportation, including a fair return on invested capital, must be covered by total receipts. Furthermore, the minimum rate charged any particular class of commodities ought to be sufficient to pay the operating expenses incurred in transporting the goods. Second, the value of the service. This fixes the maximum rate that may be charged. Were the railroads to charge more than the service is worth to the shipper the service would not be desired. Third, the value of the commodities. Between the minimum rate fixed by the operating expenses and the maximum charge determined by the value of the service actual rates may vary through a wide possible range. In determining what rates within this range will be theoretically most just and least discriminatory, consideration should be given both to the value of the service and—more than is the case at present—to the value of the articles transported. By doing this rates will be paid by the various articles of freight more nearly in proportion to their ability to pay.