Regulation and efficiency: The case of European railways

During the long period of regulation of the railway system in Europe (1950s–1990s) the companies notably improved their levels of productivity. However, parallel to this, the state of their financial accounts also significantly worsened. In order to explain this fact we have estimated both cost and revenue frontier functions, calculating the losses associated with both cost and revenue inefficiencies as well as inefficiencies on the cost side. The results obtained show the existence of significant potential losses of revenue, which can be explained above all by the strong policy of regulation andd intervention reigning in this period. A better commercial policy and a supply adapted to market conditions seem to be two unavoidable requisites for the future of European rail policy if the companies' financial burdens are to be reduced.