Knowledge that Transforms

Collective ratemaking has been practiced in various forms by American railway firms for more than a century. Its emergence antedated passage of the Sherman Act, and its survival despite both that legislation and subsequent federal and state antitrust laws stands out as a unique phenomenon in the annals of social control of business. Major challenges to collective railway ratemaking's continuance have occurred at three different periods. The most recent began with enactment of the Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act), which narrowed the scope of antitrust immunity that had been accorded to rate bureau-based pricing by the Reed-Bulwinkle Act of 1948. Foremost among the 4R Act's changes in immunity were the prohibition of 1) collective determination of particular rates on single line movements, and 2) collective pricing of interline movements by railways which cannot practicably participate in such movements. Interpretation of the 4R Act's antitrust immunity provisions, to delimit their application, occupied a four-year proceeding in which the ICC, in a decision served August 13, 1980, issued a relatively narrow grant of immunity. The ICC also declared that the 4R Act prohibited discussion, as well as voting, on single line rates. In addition, it initiated a move toward elimination of antitrust immunity for collectively determined general rate increases and decreases, and broad changes in tariff conditions on single line traffic-despite a 4R Act provision that the prohibition on single line rate voting and the restriction on jointline rate voting shall not apply to such general rate or broad tariff changes. The ICC, in essence, took the view that intramodal railway rate competition, governed largely by antitrust standards, is workable. The ICC's decision imposes a standard of commercial behavior upon railways which, to the limited extent that it ever existed, was last seen in the nineteenth century. This marked departure from ingrained practice poses the question of whether it holds perceptible potential for improving efficiency in both transport and related sectors, as its proponents envisage. Scrutiny of conditions pertaining to this question, and to prospective consequences of the ICC's decision, occupies the remainder of the paper. Doing so requires the review of some very old but oft-slighted economic and institutional traits of rail transport.

The Basic Economics Test (BET) (see Chizmar, Ronald Halinski, and Bernard McCarney) and the Test of Economic Literacy (TEL) (Soper, 1978) are achievement tests of the basic principles of economics designed for use in grades 4 through 6 and in grades 11 and 12, respectively. The BET represents a substantive revision of the Test of Elementary Economics (TEE) developed in 1971, while the TEL is an update of the Test of Economic Understanding (TEU) published in 1963. The decision to revise the TEU and subsequently the TEE was motivated by three considerations. First, the Framework for Teaching Economics: Basic Concepts (W. Lee Hansen et al.) was released in 1977. This document presented the most recent statement of the conceptual structure of the economics discipline and related that structure to decisionmaking. It was envisioned that this structure would be used by curriculum planning groups in designing K-12 economics programs. In conjunction, new evaluation instruments to be used in the planning and evaluation processes reflecting the specifications of the Master Curriculum Guide (MCG) Framework were now needed. Second, the period of the late 1970's saw many important curriculum materials developments. Two deserve special mention. The MCG Strategies for Teaching Economics, available now in five grade-specific or discipline-specific volumes, have detailed specific guidelines for teaching the concepts outlined in the MCG Framework. In addition, a number of excellent audio-visual curriculum products have become available for use at various grade levels (see Laurence Moss). For example, Trade Offs, a series of fifteen 20-minute color television film programs in economics education for children 9 to 13 years of age, was released in 1978. Because of these and other curriculum developments, new testing instruments were now needed. Third, in the decade of the 1970's many theoretical and empirical advances have been made in the models used to evaluate changes in cognitive achievement due to educational innovation (see John Siegfried and Rendigs Fels). Although these models have been devised and utilized primarily at the college level, they have begun to trickle down to evaluations conducted at the high school and grade school levels. Worthwhile evaluation must be built on a solid foundation of good data. In 1970, Wassily Leontief -in his presidential address to the Association cautioned the discipline against elaborate model building (what Frisch called playometrics) in the face of deficient data:

The arbitrage argument extends to the case of many risk assets: the equilibrium leverage ratio will vary with the riskiness of the asset backing up the loan and variations in leverage will then substitute for variations in the interest rate. However, it can readily be shown along the lines of [Vernon L.] Smith that competition in leverage terms would be insufficient to correct the inefficient allocation of claims produced by the market when the interest rate is fixed.4

The past decade has witnessed a strong interest among students of local public finance in models of voting with one's feet and in models of actual voting. Several authors, including Noel Edelson, Susan Rose-Ackerman, and Michael Lea, have recognized that these two types of voting must be considered simultaneously. The capitalization of local fiscal variables into house values, which is a by-product of voting with one's feet, influences the decisions of the median voter; and the pattern of local services that arises through actual voting influences the allocation of households to communities. A full-fleged merger of the two types of voting requires an analysis of capitalization in a model that considers both the housing market and the local voting process in a metropolitan area with diverse local governments financed by property taxes. Previous articles have focused on pieces of this puzzle. This paper reviews my attempt to bring these pieces together. My analysis reveals that, regardless of supply responses, capitalization is a feature of long-run equilibrium. Furthermore, in the presence of capitalization, an efficient pattern of local services cannot be obtained through voting with one's feet, but must be obtained instead through actual voting. If preferences in a community are not too diverse, the median voter will pick the efficient level of services with or without capitalization. However, the median voter's choice may not be efficient in an extremely heterogeneous community. In addition, capitalization breaks the link between tax payments and the choice of a community, and thereby insures that the property tax is not a benefit tax; in other words, it insures that housing is underconsumed relative to other goods. These results provide a framework for evaluating state and federal policies toward local governments. Without much heterogeneity within communities, one could achieve efficiency by eliminating the property tax or offsetting it with large subsidies to housing. These approaches are not realistic, however, and a second best solution is to cut back local services. The form of such a cutback is important. I show that tax limitations do not lead to efficiency, but that a second best solution could be obtained by redesigning intergovernmental grants.