Far West railroads

Exercise

Sometimes transportation is cited as example of positive externalities. It is mentioned, for example, that the construction of the railroad in the Far West lacked incentives because there was not people living there. At the same time, however, no people were living there because the lack of transportation made living difficult and farming unproductive. The Government solved the problem by granting the railroads rights to half the land along the railroad, land that the railroad could then sell to settlers. The railroads even sent hundreds of agents to Europe to recruit settlers.

In principle, it is unclear why this integration of land and railroad was necessary. Why was not possible for the railroads just to recover their investment by charging landowners for their transportation services?