Reference no: EM131663330

Question: The Staggers Rail Act of 1980 substantially reduces the power of the Interstate Commerce Commission (ICC) to control the rates that railroads charge shippers. (Historical note: in 1997, the ICC became extinct; it took 17 years to finally abolish it. The ICC used to control not only the rates but also all the transportation routes)

a.   The president of the National Coal Association has denounced the system of "letting the railroads charge what the traffic will bear" and has called for renewed rate regulation. Many other shippers, however, applaud the extensive deregulation of the railroads.

• Why might the coal industry favor rate regulation while most shippers oppose it? [Hint: Recall what does regulation do to an industry and what is in the rate base. Also note that shippers are specialized companies that bundle or combine goods/products, which other manufacturers produce, into containers for shipping]

b.   A 1980 study of the price elasticity of demand for rail transport of grain in the Corn Belt states (Iowa, Illinois, Kansas etc...) calculated an elasticity coefficient of -3.75.

• Why is the demand elasticity so high? In other words, who are the competitors in these parts of the US?

c.   Berkshire Hathaway Inc., owned by billionaire Warren Buffett, purchased Burlington Northern Santa Fe Corp (BNSF) about 8 years ago. BNSF is a rail transport company. Given that the elasticity value is so high (-3.75), why did Warren Buffet buy BNSF? [Hint: what type of products does BNSF rail cars carry? And what the BNSF rail network looks like (please look it up on the Web at https://www.bnsf.com/ then click on the map)]? This last question induces you to pay attention to the train derailment and explosion in July 2013 that killed about 50 Canadians in a small city located by the US-Canada border. The noted killer train was not BNSF.