Should Urban Transit Subsidies Be Reduced?
AbstractThis paper derives intuitive and empirically useful formulas for the optimal pricing of passenger transit and for the welfare effects of adjusting current fare subsidies, for peak and off-peak urban rail and bus systems. The formulas are implemented based on a detailed estimation of parameter values for the metropolitan areas of Washington (D.C.), Los Angeles, and London. Our analysis accounts for congestion, pollution, and accident externalities from automobiles and from transit vehicles; scale economies in transit supply; costs of accessing and waiting for transit service as well as service crowding costs; and agency adjustment of transit frequency, vehicle size, and route network to induced changes in demand for passenger miles. The results support the efficiency case for the large fare subsidies currently applying across mode, period, and city. In almost all cases, fare subsidies of 50% or more of operating costs are welfare improving at the margin, and this finding is robust to alternative assumptions and parameters.
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Bibliographic InfoPaper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 060723.
Length: 47 pages
Date of creation: May 2007
Date of revision:
Transit subsidies; Scale economies; Traffic congestion; Welfare effects;
Other versions of this item:
- R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Systems - - - Government Pricing and Policy
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-07 (All new papers)
- NEP-GEO-2007-07-07 (Economic Geography)
- NEP-URE-2007-07-07 (Urban & Real Estate Economics)
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