The productive efficiency of the railway systems in 19 OECD countries is analysed. The empirical results show that: (i) railway systems with high dependence on public subsidies are significantly less efficient than similar railways with less dependence on subsidies; (ii) railways with a high degree of managerial autonomy from regulatory authorities tend to achieve higher efficiency.

Subsidies to airlines serving small communities are found to have reduced fares slightly, but to have had little or no effect on quality of service, and may have even reduced frequency. If Congress decides to continue subsidies, the basis should be changed to encourage competition.

In determining the level of subsidy, and its use in reducing fares or increasing frequencies, weight should be given to the comparative benefits accruing to different income groups. A local authority will be influenced in its decision by the proportion of the cost that is borne by central government.