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Should Urban Transit Subsidies Be Reduced?

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  • Ian W. H. Parry
  • Kenneth A. Small

Abstract

This 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, accident externalities, scale economies, and agency adjustment of transit service offerings. We apply them using parameter values for Washington (DC), 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. (JEL L92, R41, R42, R48)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 3 (June)
Pages: 700-724

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:3:p:700-724

Note: DOI: 10.1257/aer.99.3.700
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  1. Mohring, Herbert, 1972. "Optimization and Scale Economies in Urban Bus Transportation," American Economic Review, American Economic Association, vol. 62(4), pages 591-604, September.
  2. Parry, Ian & Small, Kenneth, 2002. "Does Britain or the United States Have the Right Gasoline Tax?," Discussion Papers dp-02-12-, Resources For the Future.
  3. Glaister, Stephen, 1974. "Generalised Consumer Surplus and Public Transport Pricing," Economic Journal, Royal Economic Society, vol. 84(336), pages 849-67, December.
  4. Dodgson, J S, 1986. "Benefits of Changes in Urban Public Transport Subsidies in the Major Australian Cities," The Economic Record, The Economic Society of Australia, vol. 62(177), pages 224-35, June.
  5. Glaister, Stephen & Lewis, Davis, 1978. "An integrated fares policy for transport in London," Journal of Public Economics, Elsevier, vol. 9(3), pages 341-355, June.
  6. Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1993. "A Structural Model of Peak-Period Congestion: A Traffic Bottleneck with Elastic Demand," American Economic Review, American Economic Association, vol. 83(1), pages 161-79, March.
  7. Gunnar Lindberg, 2001. "Traffic Insurance and Accident Externality Charges," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 35(3), pages 399-416, September.
  8. Small, Kenneth A. & Gomez-Ibanez, Jose A., 1999. "Urban transportation," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 46, pages 1937-1999 Elsevier.
  9. Proost, Stef & Dender, Kurt Van, 2008. "Optimal urban transport pricing in the presence of congestion, economies of density and costly public funds," Transportation Research Part A: Policy and Practice, Elsevier, vol. 42(9), pages 1220-1230, November.
  10. Winston, Clifford & Maheshri, Vikram, 2007. "On the social desirability of urban rail transit systems," Journal of Urban Economics, Elsevier, vol. 62(2), pages 362-382, September.
  11. Kraus, Marvin, 1991. "Discomfort externalities and marginal cost transit fares," Journal of Urban Economics, Elsevier, vol. 29(2), pages 249-259, March.
  12. Nelson, Peter & Bagliano, Andrew & Harrington, Winston & Safirova, Elena & Lipman, Abram, 2006. "Transit in Washington, D.C.: Current Benefits and Optimal Level of Provision," Discussion Papers dp-06-21, Resources For the Future.
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