The cost structure of transit in small urban and rural U.S. communities

The cost structure of transit agencies that provide service to small urban and rural communities in the United States is estimated, the justification for government support of these agencies on the basis of natural monopoly evaluated, and the cost implications of combining transit agencies investigated. Increasing returns to density are found at all levels of output suggesting that marginal cost pricing will not recover full costs, and that government intervention is justified. Increasing returns to size are also found suggesting that expanding transit service areas is beneficial. Economies of scope between demand-response service and fixed-route service are found for average-size agencies suggesting benefits to combining these services for mid-size organizations. In order to examine the cost implications of combining transit agencies, we investigate the necessary and sufficient condition for natural monopoly – cost subadditivity. Rural transit is found to be a natural monopoly when service to a fixed service area is considered, suggesting that combining transit agencies that have duplicative service areas is likely to be beneficial – particularly when such transit agencies provide one type of service. On the other hand, there is little evidence of rural transit being a natural monopoly when the alternative to single provision of transit service is two systems with smaller service areas. This suggests that combining transit agencies with smaller service areas into larger regional systems may not be beneficial. We also find that rural transit agencies have excess capacity, suggesting that federal guidelines regarding vehicle purchase should be reviewed.