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Lecture07_fall2009

# Lecture07_fall2009 - Ec183 Fall 2009 Leah Boustan Lecture 7...

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1 Ec183, Fall 2009 Leah Boustan Lecture 7: Agenda • Complete social savings calculation for the railroad • Lecture on the rise of big business and the Great Merger Movement Review: Social savings of the railroad • How much lower would US GDP have been in 1890 if the railroad had never been built? • We need three pieces of information: – Quantity of transportation services demanded (ton-miles) – Price per ton mile absent/with the railroad • Between region transport (western to eastern cities): – Transport around 150,000 tons of goods for 1,000 miles – RR freight rates were more expensive = \$-39 million – But, RR allowed savings on insurance, inventory and hauling costs = \$73 million

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2 Within region: From farm to farm city To begin, assume that we know the price of transport with and without the railroad (P low and P high ) Question: What is the quantity of transport services demanded in each case? Would all of the land under cultivation still be farmed without the RR? • Blue circle: c + (P low d 1 ) = P good • Orange circle: c + (P high d 2 ) = P good • Rearrange terms: d 1 > d 2 • If all land remains farmed, RR seems more important because multiply greater quantity of transport services by (P high – P low ) d 2 d 1 Farm city Within region: From farm to farm city • Second issue: Do we really know P high ? • We can assume that, absent railroad, only shipping option is wagon on unsurfaced roads. • But, entrepreneurs may have added extra canals or paved roads, reducing P high • Without new investments, RR seems more important
3 Within-region social savings calculation: Estimates under different assumptions NOTE: All numbers are % of GDP in 1890. For various counter- factual worlds, by how much would GDP fall absent the RR? Keep in mind: All of these numbers are relative to the “real” world with the RR. Final social savings calculation

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Lecture07_fall2009 - Ec183 Fall 2009 Leah Boustan Lecture 7...

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