§ 540. Business situation should not be ignored altogether. The same question was again raised and elaborately considered by the Interstate Commerce Commission in the case of Chicago Live Stock Exchange v. Chicago Great Western Railway. The railroads had again made the same rate on live stock and its products. It was shown that in some respects the cost of carrying one was lower-in other respects, the cost of carrying the other. Mr. Commissioner Fifer said:

"Another very important factor is the relation existing between the articles transported. If the relation is remote, such as that between flour and silk, a change of a few cents per hundred pounds in the rates charged for transporting one of them may not affect traffic in the other; but if the relation is close, such as that between raw material on the one hand and goods manufactured from that material on the other, a slight change in the adjustment of transportation charges between the two articles may be sufficient to close manufacturing plants at some points and increase the output of plants located elsewhere. And it is because of this difference that some discriminations made by carriers are justifiable under certain circumstances.

"The competition between live stock and the products of live stock is very severe both in the markets of purchase and in the markets of sale, and live stock raised in the vicinity of the Missouri River is now and for many years has been transported to and slaughtered at different points in territory lying between that river and the Atlantic Seaboard. Packing houses at these different points have been established and maintained under rates of transportation which, generally speaking, have not been higher, while in many instances they have been lower, on the live stock than on the products; and the principle governing this adjustment, namely, that the rates on raw material shall not be greater than on the products of the material, has been applied in nearly all cases of a similar nature."

4 10 I. C. C. Rep. 428 (1905).

541. Rates should not equalize differences in value. The railroad cannot by its rates equalize qualities of the same article between different producers. In McGrew v. Missouri Pacific Railway, the defendant contended that as coal from its mines at Rich Hill has less value for domestic purposes than Myrick coal it might equalize such difference in value by making a lower rate on Rich Hill coal. The complainant's cost of mining coal at Myrick is nearly 50 cents a ton more than it costs defendant to mine its coal at Rich Hill. The Commission, however, held that this difference in quality would not justify a difference in rate. Mr. Commissioner Prouty said: "If difference in quality is to be equalized in favor of the defendant, why should not difference in cost of mining be equalized in favor of the complainant? When this complainant acquired his mine he knew that the value of this coal was greater for domestic purposes than that of Rich Hill, and the price of his mine may well have been fixed in view of that fact, but such an adjustment of rates as that put in force by the defendant entirely eliminates this element of value and might destroy the worth of complainant's property. If any such process of equalization is permissible defendant may absolutely dictate the comparative value of every mine and industry upon its road; and that such rates. should be examined with closest scrutiny when resorted to by the carrier in its own favor." ›

§ 542. Passenger fares slightly affected by this principle. Passenger schedules are usually made upon a mileage basis; there is little attempt in making them up to minimize the disadvantages of distances. But the principle is applied to a very limited extent by the railroads; for example, suburban stations are sometimes grouped in zones. The principal illustration of this policy, if it be such, of equalizing passenger fares is the five cent fare customary in American municipalities for transporta

58 Int. Com. Rep. 630 (1906).

ditions and in the quantities that it does, yields to these carriers a very handsome profit." 5

§ 512. Rule of proportionality in sharing costs.

As an abstract matter the fairest way to determine the cost of any particular service would be to apportion rateably the total disbursements of every sort to the various items of traffic and so to arrive at proportionate rates. Theoretically, perhaps, any other method is less just to all concerned. In determining what is a reasonable rate for services rendered, it is hardly proper to take the road as existing and as maintained, with its track and terminal equipments, salaries and all other expenses, and to regard as the total cost of any particular service merely the increased expense necessary to add to its business the service in question; truly the cost of that service ought to include its fair share of the interest on investments and of the general expenses.

6

513. Law of decreasing costs.

It has been pointed out, however, in all discussions of the railroad problem by economists that the fixed expenses, which constitute so considerable a proportion of the disbursements by a railroad, are to a very large extent independent of the amount of its traffic carried. Therefore additional business will always be done at a decreasing relative cost. The net income rises as the business expands, and the law of increasing returns is again demonstrated. This may be shown in a simple formula if it be assumed only one-half of the expenditures of a railroad varies with the traffic. "If it costs x to deal with 1,000,000 units of traffic, 5,000,000 units will cost not 5x, but 1-2x +

5 Prouty Commissioner in Re Advances in Freight Rates, 9 I. C. C. Rep. 382, 397 (1903).

6 Dalton v. Boston & A. R. Co., 1885, Mass. Ry. Com. p. 130.

7 Noyes: American Railroad Rates, p. 19.

(1-2x × 5) = 3x."8 How far it is possible to justify by this economic law the making of differences in freight rates is discussed in several places later in this volume.

This rule seems to have been applied in a case before the English Commission. This was an application to determine the amount of the remuneration to be paid per annum by the Postmaster-General to the Waterford Railway Company for the conveyance of mails on their railway: (1) By certain special or notice trains required to be run on notice from the PostmasterGeneral. (2) By certain ordinary or agreed trains timed by agreement with the Postmaster-General. It was held, that the remuneration for carrying the mails ought not to include any sum directly representing the capital cost of providing the railway; and, further, that the definite sum to be paid should be of sufficient amount-(1) To give the railway companies payment for the mails at their ordinary parcels rate, less a rebate of onethird of it, in consideration of the usual terminal services in connection with parcels being done in the case of the mail parcels by the Postmaster-General; (2) To make up to them, when required, the gross receipts of the notice trains to 5s. per train mile; (3) To compensate them for possible decrease of the receipts of agreed trains due to their times of running being partly fixed to meet postal requirements, the allowance under this head to be "substantial" one.

a

§ 514. Cost of service a principle applicable to passenger

fares.

Cost of service is plainly a principle in rate making to be applied to passenger fares as well as to freight rates. It cannot be more scientifically done in one case than in the other, but it is always a matter to be inquired into. Various considerations

8 Acworth: Elements of Railway Economics, p. 50.

9 The Waterford, Limerick and Western Ry. Co. v. Postmaster-General, 11 R. & C. T. Cas. 77.

affecting the cost of passenger service are suggested in the extract from an opinion by the Interstate Commerce Commission 10 which follows, which held not invalid a fare at 3.826 cents per mile between Savannah and Charleston: "This railway between Savannah and Charleston runs mostly through swamp lands and crosses a number of rivers. From Savannah it runs parallel with the Savannah River, crossing it to the South Carolina side; the other streams crossed are the Coosawhatchie, the Salkehatchie, the Ashepo and the Edisto. Five or more drawbridges are operated. The road had eight miles of trestling, but, by filling in, the trestle mileage has been reduced to four. On account of the swamps and rivers, the construction of the road involved more than ordinary cost, and unusual expense is required to maintain it in a good state of repair. The section traversed by the line is unhealthy, much of it is uninhabitable, and the population is made up almost entirely of colored persons. They have little patches of land, and some are employed in rice cultivation. Up to about three years ago phosphate mines in that region were worked extensively, but that industry has been abandoned to a considerable extent, because, it is suggested, of the discovery of phosphate rock in Tennessee, Florida, and other localities. There is one fertilizer factory located on the line, about 35 or 40 miles south of Charleston. There are no places of importance between the termini of this road, and the counties in South Carolina penetrated by the line (not including Charleston County) number 28 persons to the square mile as against 34 1-2 to the square mile throughout the whole State. After leaving Chatham County, which includes Savannah, the road passes through Effingham County, Ga., which has about 13 persons to the square mile."

10 Savannah B. of F. & T. v. Charleston & So. R. R., 7 I. C. C. Rep. 601 (1898).