Should Urban Transit Subsidies Be Reduced?

Abstract

JEL Codes: R48, H21.Key words: transit subsidies; scale economies; traffic congestion; welfare effectsWe are grateful to Richard Arnott, Bruno De Borger, Stef Proost, Ian Savage, George Tolley, Kurt Van Dender, Clifford Winston, two referees, and numerous seminar participants for helpful comments and suggestions. We also thank Chun Kon Kim, Elliot Klein, and Helen Wei for research assistance. Kenneth Small thanks the University of California Energy Institute for financial support. All responsibility for accuracy of the paper lies with the authors. Should Urban Transit Subsidies Be Reduced? AbstractThis paper derives empirically tractable formulas for the welfare effects of fare adjustments in passenger peak and off-peak rail and bus transit, and for optimal pricing of those services. The formulas account for congestion, pollution, and accident externalities, scale economies, and agency adjustment of transit service offerings. We apply them using parameter values for Washington (D.C.), Los Angeles, and London. The results support the efficiency of the large current fare subsidies; even starting with fares at 50 percent of operating costs, incremental fare reductions are welfare improving in almost all cases. These findings are robust to alternative assumptions and parameters.

Multimodal pricing and optimal design of urban public transport: The interplay between traffic congestion and bus crowding

“…More generally, this result points to the potential optimality of very low public transport fares and large subsidies if car use is substantially under-priced (common in peak periods), in line with 15 The principles behind first best and second best pricing are extensively analysed in Small and Verhoef (2007) and Tirachini and Hensher (2012) among others. 16 A negative second best bus fare is also obtained by Ahn (2009 earlier findings (Glaister and Lewis, 1978;Proost and Van Dender, 2008;Ahn, 2009;Parry and Small, 2009) 17 . Figure 16 shows the difference between optimal toll and fare in the first best and second best scenarios for demand models M1, M2 and M3 (therefore, in the second best scenarios the curves are equal to the absolute value of the negative bus fare).…”

“…However, some authors such as Parry and Small (2009) assume that, in mixed traffic, buses should be given a greater weight in the congestion functions (10) and (11), given that their stops to load and unload passengers have an effect on the capacity of lanes and impose delays on other modes including cars (Koshy and Arasan, Zhao et al, 2007). We find that when doubling the passenger car equivalency factor (to between 3.3 and 6) optimal bus frequency is reduced, and that the impact is stronger if no crowding externalities are explicitly modelled (M1, Figure 13) than when the crowding disutility is accounted for, in which case the crowding externality dominates over the congestion externality (M2, Figure 14).…”

“…The model is applied to a single transport corridor in Sydney, Australia, which allows us to obtain detailed measures of crowding levels section by section. In contrast to other social welfare maximisation models (e.g., De Borger et al, 1996;Proost and Van Dender, 2004;Wichiensin et al, 2007;Ahn, 2009;Parry and Small, 2009;Jansson, 2010;Basso et al, 2011), our approach provides a more comprehensive modelling of the bus mode, including bus frequency, bus size, fare collection system, bus boarding policy, number of bus seats and fare level as decision variables. We also show that the inclusion of a nonmotorised mode (walking) as an alternative to choosing bus and car for short trips may have a significant role when the transport system is optimised in highly congested scenarios 1 .…”

Crowding in public transport systems: Effects on users, operation and implications for the estimation of demand

“…Crowding as a factor that affects the users' utility and generalised cost of travelling has been recognised by several authors in the analysis of public transport pricing and supply policy (Jansson, 1979;Kraus, 1991;Jansson, 1993;Arnott and Yan, 2000;Huang, 2002;Pedersen, 2003;Pels and Verhoef, 2007;Parry and Small, 2009). The basic idea is that when a person boards a bus or a train, they may impose a crowding externality on everyone else on board, which is especially noticeable when there are passengers standing.…”

Income Tax Deduction of Commuting Expenses and Tax Funding in an Urban CGE Study: The Case of German Cities

“…This is the reason why we implement revenue neutral tax reforms where we look at 3 Of course, there is a large body of literature on transport subsidies in general (see e.g. De Borger and Wuyts, 2009;Parry and Small, 2009;Borck and Wrede, 2009;Su and DeSalvo, 2008;Borck and Wrede, 2008;Brueckner, 2005;Borck and Wrede, 2005;van Dender, 2003;Calthrop, 2001;Martin, 2001;Zenou, 2000) applying either non-spatial or spatial approaches. Tscharaktschiew and Hirte (2011) provide a review of the corresponding literature and summarize the main …ndings.…”