Georgina, as the engine has been named, is believed to be the first ever full-size steam engine built in the town.
Until now the line has been operated by historic steam outline diesel locos built when the line opened in 1931.
David Humphreys, managing director of North Bay Railway Company Limited said: “The original engines were made to look like steam engines and they were pioneers in their day.
“The irony is that whereas most railways have started with steam engines and gone over to diesel we are doing things the other way round at the North Bay Railway.”
The new steam engine is a full sized updated design based on an 0-4-0 loco originally built by Bagnall of Stafford.
It is a Sipat class saddle tank, the original was built in 1909 for the Sipat Water Works in India
The locomotive was named by BBC newsreader Harry Gration MBE at a ceremony yesterday.
Georgina was built by the North Bay Railway’s engineering team which has been expanded to handle outside work for other railways.
The business now employs six full-time engineers and has won contracts from other heritage lines.
In addition to the railway work they’ve also won orders for road traction engines and boilers for steam launches.
Mr Humphreys added: “The team should be very proud of what’s been achieved over the last three years.
“They’ve built a loco for the railway that will still be around in 100 years time using traditional skills that all but disappeared 60 or so years ago.
“We are pleased to be offering similar services to other organisations and individuals who need new locos or their existing steam engines rebuilding.”
Tom Fox, Mayor of Scarborough, will also at the naming ceremony added: “I am delighted that David and his team have made the steam engine in and for the town and we hope it will run without problems for a long time to come. It is great to see something that will be thrilling people for many generations to come”.
Georgina will be pulling trains on the afternoons of Friday, Saturday, Sunday and Monday.