Ifo Viewpoint No. 8: Transrapid

Hans-Werner Sinn
Munich, 01 Dec. 1999

It will cost approximately DM 10 billion to build the dual-track magnetic levitation train, Transrapid, between Berlin and Hamburg. The federal government is to pay DM 6.1 billion of the costs and the federally owned Deutsche Bahn DM 3.7 billion, the latter sum being financed by a private operating company. The operating company will receive payment in the form of a fixed rent from Deutsche Bahn. The surplus of revenue over variable operating costs will first be used for this rent; the remainder, if any, will be distributed in equal shares to the federal government, Deutsche Bahn, and the operating company.

The great uncertainty is the revenue surplus, since it is based on questionable passenger projections and on the price elasticity of demand. Many experts doubt whether the maximum possible surplus will be sufficient to cover the investment costs of the private operators. Deutsche Bahn and the operating company expect operating losses, and the government seems to have accepted the demise of Transrapid, having concluded from the private losses that Transrapid will also generate social losses.

Equating private returns and social returns in the same way is useful in general but not in the case of public goods, which are characterized by low variable operating costs, absence of crowding externalities, and comparatively high fixed costs, all of which apply to the Transrapid project. An optimal economic utilization of Transrapid calls for ticket prices that would just cover the variable (marginal) operating costs and which would then generally produce no revenue surplus that could be applied to the financing of the fixed costs. Setting a ticket price that is higher than this would not be economically wise since it would discourage passengers who would be prepared to pay more than the marginal costs they cause. In the case of public goods, fixed costs must not be distributed, a principle that everyone naturally adheres to in the use of streets, bridges, dams, the judicial system and the police force.

The conclusion is that new negotiations and an economic cost-benefit analyses are needed. Deutsche Bahn, as the operator, should be told to set prices that only cover the variable operating costs, and the whole projects should be financed by the government. Private investors are not required for the provision and financing of public goods. Transrapid is no exception.

Hans-Werner Sinn
President of the Ifo Institute