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The Case for Subsidisation of Urban Public Transport and the Mohring Effect

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  • Leonardo J. Basso
  • Sergio R. Jara-Díaz
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    Abstract

    In this journal, van Reeven (2008) develops a model aimed at showing that scale economies on users' time costs would not provide a justification for public transport subsidies. He claims that a profit-maximising operator allowed to take the demand effects of its pricing into account would offer a frequency f π at least as high as a welfare-maximising one f*, and with no welfare losses. We show that his result depends crucially on a strong assumption of demand. Introducing a slight modification to make it more realistic, we show: (i) f* > f π , (ii) welfare losses emerge under profit-maximisation, (iii) subsidies are required for first-best operation. Thus, the Mohring effect is a valid argument for subsidisation. © 2010 LSE and the University of Bath

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    Bibliographic Info

    Article provided by London School of Economics and University of Bath in its journal Journal of Transport Economics and Policy (JTEP).

    Volume (Year): 44 (2010)
    Issue (Month): 3 (September)
    Pages: 365-372

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    Handle: RePEc:tpe:jtecpo:v:44:y:2010:i:3:p:365-372

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    Web page: http://www.bath.ac.uk/e-journals/jtep

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    Cited by:
    1. Bar-Yosef, Asaf & Martens, Karel & Benenson, Itzhak, 2013. "A model of the vicious cycle of a bus line," Transportation Research Part B: Methodological, Elsevier, vol. 54(C), pages 37-50.
    2. Andrés Gómez-Lobo, 2011. "Monopoly, subsidies and the Mohring effect: A synthesis and an extension," Working Papers wp336, University of Chile, Department of Economics.

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