This paper analyzes the market failure of passenger rail in the U.S. from 1920-1970 and the government's response in creating Amtrak. It examines whether Amtrak adequately addresses the collapse of passenger rail, highlighting its benefits, operational challenges, and the impact of competition from cars and airlines. The paper also discusses the broader implications for public policy and transportation efficiency.

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PUAD 607 – Final Paper April 26, 2016
AU ID 1855383 20
Introduction
This paper will analyze the market failure of the passenger rail market, which
occurred between 1920-1970, and the government response that created Amtrak.
This paper aims to determine whether or not Amtrak’s creation was an adequate
policy response to the collapse of passenger rail market in the United States. This
paper will analyze Amtrak’s benefits to the public and alternatives in the passenger
rail market.
Short history of passenger rail
Train travel was very common in the United States in the 19th and early 20th
centuries. As the country expanded west, railroad companies laid thousands of miles
of track and provided freight and passenger service to every city and territory in the
country. During this time, the railroads were some of the most powerful
corporations in America. By the 1920s, there were over 20,000 passenger trains in
service, connecting every city to an efficient, national rail transportation network.1
Passenger rail was so popular that it influenced the country’s culture, inspiring
books about train robbers, Broadway musicals, and movies like Union Pacific,
Strangers on a Plane, and North by Northwest.
Rail faces overwhelming competition
Beginning in 1908, the Ford Motor Company began producing the Model T,
America’s first affordable automobile for the middle class. The model T was the start
of an automobile revolution that drew a devastating blow to passenger rail in the
1 Nice, David. “Amtrak: The History and Politics of a national railroad.” 2

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United States. Rail’s decline was slow but steady: ridership declined by 80%
between 1920 and 1970,2 while car travel rose significantly. Policy decisions by the
federal and state governments hastened passenger rail’s decline in light of
consumers’ preference for cars.
Facing stiff competition, railways began losing money in their passenger
businesses. Many carriers, such as the Pennsylvania Railway and New York Central,
wanted to drop their passenger service entirely. The government made this difficult
for the railroads: The Interstate Commerce Commission (ICC) imposed strict
regulations on the railways that made adapting to the new marketplace difficult.
Carriers reacted by not encouraging consumers to use their passenger service
altogether. Most railway executives wanted to shift their business from passengers
to freight, which still remained profitable.
The creation of the Interstate Highway System in 1956 made car travel even
more appealing to consumers. Federal and state government helped subsidize car
travel by building massive car infrastructure projects all over the country. The
railroads were also heavily taxed: The federal government maintained a 15% tax on
passenger rail until 1962, and many local municipalities maintained high property
taxes on railroads in their jurisdictions.
The suburbanization of the American cities also contributed to passenger
rail’s decline. Most city governments never invested in rail transportation, making it
impossible for consumers to ride public transportation to stations that provided
passenger rail service. Only three cities—New York, Boston and Chicago—built and
2 Nice, “Amtrak: The history and politics of a national railroad.” 2

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maintained light rail during this period. Suburban America seemed to prefer the
freedom of car travel, and the government invested accordingly.
Lastly, the introduction of jet airline travel caused many consumers to
choose flying over taking the train for long distance travel. In 1958, Boeing 707s
entered the market, dramatically shortening travel time for long trips. The
government invested in airlines by building hundreds of new airports throughout
the country. Driving and flying were now the “cool” things to do in American
culture—a new era in transportation had emerged.
By late 1960s, the end of passenger rail was nearly complete. Facing severe
financial difficulties, the country’s two largest carriers—Pennsylvania Railroad and
New York Central— merged to form Penn Central in 1968. In June of 1970, Penn
Central filed for bankruptcy. The collapse of Penn Central was the largest corporate
bankruptcy in American history at the time.3
1970: Market failure
The 1970 bankruptcy of Penn Central, then the last remaining passenger
service, signaled the total failure of the market in the United States. Railroads
executives complained to the government that passenger rail was facing extinction.
Rail industry groups and unions became intensely paranoid about the possibility of
lost jobs, pensions, and commerce related to the failure of the industry. The collapse
of Penn Central and the subsequent political pressure from rail stakeholders that
followed initiated a policy response from the government. By 1970, the Nixon
3 Wikipedia, “Penn Central Transportation Company.”

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administration was faced with several policy proposals from the railroads, lobbyists,
and Congress to address the market failure.
Policy proposals and response
Representatives from Penn Central and its subsidiaries lobbied Congress for
direct subsidizes to assist their operating budget, which faced severe shortfalls due
to a drop in consumer demand for passenger service. The Association of American
Railroads called for public subsidies and for a publically owned pool of passenger
rail equipment.4 Some stakeholders lobbied congress to loosen ICC regulations on
the railroads in an attempt to restart the market.
The Nixon administration didn’t want to directly subsidize the private
railways, nor commit to a long-term financial agreement with the railroad industry.
Nixon officials didn’t want to be held responsible for the total collapse of the
passenger rail market either.
Their solution was the creation of Railpax, later renamed Amtrak. Nixon
considered the creation of a public-private passenger rail corporation to be a more
efficient and cheaper alternative than a direct-subsidy program to Penn Central,
which would commit the government to years of funding and oversight. Nixon also
believed that Amtrak would become profitable and off government support within a
few years of operation. Less than a year after the bill was signed into law, Amtrak
began its service in 1971.
Initial problems
4 Nice, “Amtrak: The history and politics of a national railroad.” 8

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From the beginning, Amtrak faced several operational and financial
problems. The conditions of its trains were very poor: Amtrak inherited trains from
Penn Central, which did not properly maintain their trains in the last 25 years of
operation. As David Nice writes:
“When Amtrak began operations, its average car and locomotive
were more than twenty years old, and many were not in very good
condition. The climate control systems of many cars had changed
little since the days of steam locomotives. Quite a number of cars had
features unique to individual railroads and consequently were not
readily interchangeable. Amtrak inherited thirteen different manual
reservation systems, and arrangement that made booking trips
difficult.”5
Amtrak faced initial financial difficulties as well, and sought additional
money from the federal government after only six months of operation.6 The
government’s initial investment of $66 million dollars in Amtrak was not nearly
sufficient to cover its costs, considering that Penn Central lost nearly $450 million
while in its last year in business in 1970.7 Government mandates for Amtrak also
poised a problem. The carrier was mandated to provide nationwide service, forcing
Amtrak to establish routes in states where there was little consumer demand.
Analysis: Policy response and government failure
Was the creation of Amtrak an adequate policy response to the market
failure of passenger rail? The question will consider two factors: First, does Amtrak
provide enough public benefits to justify its cost? Second, what are the alternatives
to Amtrak in the passenger rail market?
5 Nice, “Amtrak: the history and politics of a national railroad.” 10
6 Ibid, 10
7 Ibid, 10

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Is Amtrak worth the cost?
Since its inception in 1970, Amtrak has provided several positive
externalities that have benefited the public in a variety of ways. These positive
externalities are addressed below.
Energy independence and environmental savings
Amtrak’s passenger service contributes to U.S. energy independence by
running trains powered by electricity, coal, or diesel locomotion. Amtrak’s energy
uses are considered highly efficient (when a train is full) compared to car and air
travel, which use the majority of petroleum consumed in the U.S. In 2015, 24% of
the petroleum consumed in the country comes from foreign sources.8
Amtrak helps reduce the country’s dependence on petroleum for
transportation, especially in high volume areas like the Northeast Corridor (NEC)
and other major metropolitan areas. As rail corridors become more electrified, net
energy cost savings will increase. In 2013, Amtrak reported 1.1 million metric tons
of CO2 emissions (GHG)9. Total GHG emissions from transportation in the United
States in 2013 totaled 1.7 billion metric tons of CO2. As a percentage, Amtrak
produces less than 1% of total carbon emissions from transportation industry in
2013.10
While real, the environmental savings that occur when consumers choose to
take the train over flying or driving are hard to measure. Cost-savings should be
viewed in the context of total U.S. energy consumption in transportation, which has
8 EIA, http://www.eia.gov/tools/faqs/faq.cfm?id=32&t=6
9 Amtrak, “2013 Sustainability report.” 18.
10 EPA, “Sources of GreenhouseGas Emissions.”

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diversified its sources of energy in the last 15 years. Hybrid and electric cars are
becoming more popular among drivers. Local markets have invested in solar and
wind energy, especially on the west coast. Amtrak’s contributions to energy
independence and environmental savings might lessen as the energy market
continues to diversify and invest in green technology.
Transportation efficiency
Amtrak’s most measureable externality is its contribution to transportation
network efficiency in the U.S. Every passenger that rides Amtrak is one less person
that chooses to drive, fly, or ride on a bus. These contributions are not felt
nationwide, however. Certain areas of the country, specifically the northeast
corridor (NEC), the west coast, the Keystone corridor, central California, and upstate
New York, benefit the most from Amtrak service with regards to efficiency.11
In areas of high population density, accessibility to local public transit, and
lots of traffic, Amtrak’s passenger service is a substitute good for driving, flying, or
taking the bus. Research by David Nice indicates that Amtrak produces
contributions in efficiency in these areas, where ridership is most in demand.
Efficiency gains are most concentrated in the NEC, where car traffic between the
major east coast cities is the heaviest in the country.
Additionally, Amtrak provides efficiency gains to the national airway system
by diverting consumers away from east coast airports like Philadelphia
International, Newark International, and LaGuardia. A large percentage of airline
delays and cancellations across the country can be traced back to air traffic
11 Amtrak, “2014 Annual Report.” 20

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congestion, bad weather, and poor service at these three airports. Less flights out of
these three airports results in less problems for the entire airway system, benefiting
consumers nationwide as a result.
National Security
Amtrak provides positive externalities to the national security infrastructure
of the United States by providing transportation alternatives to car or air travel. In
cases of national emergency such as an invasion or total war, the military will need
ways to move men and supplies around the country. Amtrak’s service provides this
capability as an alternative to moving personnel and equipment by plane or truck.
Transportation grids are common targets in war: If a foreign army attacks the
homeland, our highways, interstates, and airports would be prime targets. A
functioning rail network gives our military an alternative to moving personnel and
equipment on a highway system that would be a natural target for an invading force.
Amtrak could also serve the civilian population as well in this scenario, as
gas consumption would be rationed and air travel restricted to military purposes,
forcing civilians to take the train. This occurred in the United States during WWII,
when the government rationed civilian access to gasoline for the war effort.
Economic benefits
Amtrak provides benefits to local economies, especially in the NEC. The NEC
is home to 17% of the nation’s population and produces 20% of the U.S. gross
domestic product.12 The Northeast Corridor Commission states that the region
12 NEC: Infrastructure and operations advisory commission, “The Northeast corridor
and the American Economy.” I

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contributes $50 billion annually to the national economy.13 There are close to 7
million jobs located within 5 miles of the NEC’s Amtrak stations.14 As of 2014,
40,000 passengers chose to ride Amtrak in the NEC.15 If citizens were unable to get
to work for one day in the NEC, the country could face up to $100 million in
congestion costs and lost productivity16
Federal expenditures on Amtrak spur direct and indirect investment in R&D
for train technology and services as well. Most recently, 70 of Amtrak’s newest
electric trains where constructed by the Siemens Corporation at their plan in
Sacramento, CA. Amtrak contracts with more than 60 part-suppliers in over 20
states.17 Amtrak is also a significant source of jobs throughout the country,
employing approximately 20,000 people in 2014.18
Subsidies in context
Many critics argue that Amtrak’s current subsidies don’t justify its benefits to
the public. Amtrak’s subsidies are usually compared to highway and car travel
subsidies. Critics argue that subsidies for car-travel and vehicle infrastructure
provide more benefit for a lower cost. In 2014, Amtrak received $1.5 billion in
federal subsidies.19 That same year, the federal government spent $84.99 billion on
13 NEC: Infrastructure and operations advisory commission, “The Northeast corridor
and the American Economy.” I
14 Ibid, 9
15 NEC impact, Amtrak Blog http://blog.amtrak.com/2014/04/necimpact/
16 Ibid
17 Amtrak, “2014 Annual Report.” 9
18 Ibid, 21
19 CBO, “Options for Eliminating the deficit: 2014 to 2013.”

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transportation in general20: All told, Amtrak receives 1.7% of the total federal
budget for transportation.
Indirect subsidies aren’t traditionally accounted for when comparing rail to
car subsidization. Such indirect costs for cars include funds for dealing with
pollution, parking, crash damage, congestion, lost tax revenue, land use, noise, and
transportation diversity.
The government, individual consumers, and entire sectors of the economy
absorb these indirect costs of car travel. Our healthcare system incurs tremendous
costs due to car-related injuries and fatalities. Indirect subsidies and costs related to
car travel need to be accounted for when considering the total costs of
transportation subsidies. Research reveals that cars receive comparable subsidies to
Amtrak when you account for indirect costs of car travel: accounting for these costs,
Amtrak and car travel share equal levels of subsidies, around 44 cents per passenger
mile.21
Is Amtrak a government failure?
To answer this question, we must define government failure and understand
its characteristics. Gruber defines government failure as “the inability or
unwillingness of the government to act primarily in the interest of its citizens.”22
Government failure occurs when government entities serve themselves over
the public. Government failure can take the form of corruption or “levianthan
bureaucracy”, or whenever public money is used to maximize private over public
20 National Priorities, 2014 Federal Budget.
21 The Economist, “Amtrak’s true costs.”
22 Gruber, “Public Finance and Public Policy, 4th ed.” 251

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welfare. With this definition in mind, does Amtrak maximize social welfare, or does
it exist to serve itself? Evidence suggests that Amtrak does provide positive
externalities (summarized above) to certain areas of the country. Public benefits are
most concentrated in these areas, but less prevalent in the rest of the country.
Social-maximizing benefits seem to be concentrated the most in the areas where
Amtrak services are most popular and in demand.
In this regard, Amtrak shouldn’t be considered a government failure. Aside
from mediocre reliability and the occasional accident, Amtrak has avoided abject
government failure behavior, such as corruption, rent seeking, “leviathan
bureaucracy”, or other scandals that might suggest otherwise. Most criticism of
Amtrak involves accusations of poor reliability, service, speed, and accessibility, not
corruption or rent-seeking behavior.
Alternatives
Questions of efficiency—specifically whether the private sector can do it
better—remain today. Critics of Amtrak suggest that privatization could solve many
of its efficiency problems, yet they fail to consider the downsides to privatization.
Privatization would cause tickets prices to rise because prices would reflect the true
cost of train travel, which includes hidden costs for infrastructure improvements,
safety, etc. The government’s monopoly on passenger rail gives it significant
supply-side power. This power enables Amtrak to sell their tickets cheaper than a
private firm could, thus maximizing consumer welfare in the process.

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This phenomenon occurred in Great Britain in the 1990s. Privatization of
their railroads in 1995 resulted in higher fares and greater costs23, suggesting that
when competition is introduced, suppliers have to shift the heavy costs of track
maintenance, infrastructure investments, and safety programs on to the consumer.
The benefits for national defense are also lost if Amtrak were to be
privatized: In the instance of total war, the government could easily use Amtrak
trains for war-related purposes, ferrying troops and equipment without making
them vulnerable targets on our highway system. If the rail system was turned over
to private companies, the government would have to rent them from the owners, a
situation could be costly and potentially problematic.
Privatization isn’t realistic considering current market trends in 2016, which
aren’t much different from 1970. Cars and air travel still dominate in the market.
Green technology has made driving and flying less harmful to the environment. Most
American cities are still sprawling and not connected by public transit, making train
travel inconvenient for most consumers. Cheap petroleum makes individual travel
by car or air more affordable to consumers than train travel: Taking the train is
more expensive and longer in duration than flying except for only a few routes in
the country, such as DC to NY, NY to Boston, Chicago to Milwaukee, LA to San Diego,
and Portland to Vancouver.24 Outside of these routes, train travel is more costly and
longer in duration than flying.
23 Preston and Robins. “Evaluating the long term impact of transport policy: The
case of passenger rail privitisation.” 17.
24 The Points Guys, “Train or plane? U.S. routes where Amtrak beats flying.”

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Under these economic conditions, private firms would struggle to make
money in the passenger rail business. Railroads are a capital intensive: Firms must
spend millions of dollars before providing service. Few, if any, private firms would
want to take this risk. Until market forces change in favor of trains over cars and
planes, government provision of passenger rail is the most assured way to provide
the positive externalities of passenger rail—which are well documented—to the
American public.
Recommendations
Amtrak faces the problem of chronic unprofitability. Its congressional
mandate requires the corporation to provide nationwide service in order to receive
funding, which it depends on considerably in order to operate. Federal funding is
contingent on this mandate: If Amtrak only served a few states, then supporters
could not justify its expense to the congressmen that saw no service in their
jurisdictions.
If Amtrak were privatized, the corporation would have to cut every
unprofitable route except only the few that are in demand. Yet if privatization
occurred, the difficulty of maintaining consistent profit would be immense. So
immense, that private passenger rail service could not be assured to consumers,
even in high volume corridors like the NEC. While Amtrak faces the same efficiency
problems like any publicly funded institution, the benefit of maintaining its service
via the government outweighs any potential benefits associated with privatization.
As such, the carrier should be maintained and improved, especially in areas where
its positive externalities are concentrated the most.

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Work cited
American Progress, “Understanding Amtrak and the importance of passenger rail in
the United States.” June 2014. Accessed April 2016.
https://www.americanprogress.org/issues/economy/report/2015/06/04/1
14298/understanding-amtrak-and-the-importance-of-passenger-rail-in-the-
united-states/
Amtrak Corporation, “Amtrak Annual Report: Fiscal Year 2014.”
https://www.amtrak.com/ccurl/873/115/Amtrak-Annual-Report-2014.pdf
Amtrak Corporation, “2013 Amtrak sustainability report.”
https://www.amtrak.com/ccurl/338/353/2013-Amtrak-Sustainability-Report.pdf.
Accessed April 2016.
Congressional Budget Office, “The Past and Future of U.S. Passenger Rail Service.”
September 2003. https://www.cbo.gov/sites/default/files/108th-congress-
2003-2004/reports/09-26-passengerrail.pdf
Wikipedia Foundation, “Penn Central Transportation Company.”
https://en.wikipedia.org/wiki/Penn_Central_Transportation_Company
Nice, David. “Amtrak: The history and political of a national railroad.” Lynee Rienner
Publishers. 1998.
Preston, John and Dawn Robins. “Evaluating the long term impact of transport
policy: the case of passenger rail privitisation.” The journal of Research in
Transportation Economics. June 2012. Accessed April 2016.
U.S. Energy Information Administration. “ How much oil consumed by the United
States comes from foreign sources.”
http://www.eia.gov/tools/faqs/faq.cfm?id=32&t=6. Accessed April 2016.
National Priorities Project. “Federal Spending: Where does the money go: Federal
Budget 101.” https://www.nationalpriorities.org/budget-basics/federal-
budget-101/spending/. Accessed April 2016.
The Economist, “Amtrak’s true cost.”
http://www.economist.com/blogs/gulliver/2011/11/road-v-rail. Accessed
April 2016.

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The Points Guy, “Train or plane? US routes where train beats flying.”
http://thepointsguy.com/2014/09/train-or-plane-u-s-routes-where-
amtrak-beats-flying/. Accessed April 2016.
Vranich, Josepth. “End of the line: The failure of Amtrak reform and the future of
America’s passenger trains.” AEI Press. 2004