The Crowsnest Pass rates: an evaluation of policy alternatives

The Crowsnest Pass rates are fixed rail freight rates that apply on the carriage of most Canadian grain. They were originally established in 1897, and have been embodied in Federal statute since 1925. In recent years, the rates have covered less than 40 percent of rail-grain costs. With continuing cost inflation, this proportion will decrease to even lower levels over time. Several policy alternatives are available to the Federal Government with respect to the transportation of grain by rail. These alternatives are characterized primarily by different freight rate levels. The lowest rate level considered herein is the current one; the highest is a level at which the railways would recover the long-run variable costs of the rail-grain system plus a contribution to their constant costs. For each price-level alternative, there are a range of subsidy alternatives. Depending on the particular price level, subsidies could be given to the railways, the grain producers, neither of these, or both of them. In order to evaluate the policy alternatives, there must be criteria for evaluation. The criteria used in this thesis are the major objectives that relate to the issue. Two of the objectives are to improve economic efficiency and to facilitate the development of secondary industry in the Prairie provinces. Both of these objectives favour the pricing alternative of raising grain freight rates to a compensatory level. Without producer subsidies, however, this alternative violates a third objective--that of minimizing grain-producer transportation costs. In addition to these three objectives, there are four objectives that refer particularly to the Federal Government. They are maximizing votes, implementing the "user pay" philosophy, minimizing total subsidy payments, and assisting railway variable-cost recovery in grain transport. A major consideration that is not an objective is the resistance of producers to direct, rather than indirect, subsidies. The quantitative impacts of raising rail-grain rates on the railways and on grain producers are substantial. Implementing rail freight rates equal to the long-run variable costs of transporting grain would have increased the combined net revenue of the Canadian National Railways and CP Rail by at least two-thirds in 1976. It would have decreased the net income of Prairie grain farms by (at most) 15 percent in the same year. Two policy alternatives are chosen as the better alternatives. The first policy selected is that of initial Crowsnest Pass rates, increasing over time to a larger and larger proportion of rail-grain costs. This pricing scheme would be accompanied by constant railway subsidies to reflect the difference between costs and revenues. The second policy is an immediate increase to rates covering variable costs, with subsequent annual increases to adjust for inflation. With this pricing policy, there would be constant producer subsidies equal to the initial rate increase.Business, Sauder School ofGraduat