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Should Urban Transit Subsidies Be Reduced?

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Author Info
Parry, Ian W.H. () (Resources for the Future)
Small, Kenneth

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Abstract

This 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 applied across mode, period, and city. In almost all cases, fare subsidies of 50 percent 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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Paper provided by Resources For the Future in its series Discussion Papers with number dp-07-38.

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Date of creation: 16 Jul 2007
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Handle: RePEc:rff:dpaper:dp-07-38

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Related research
Keywords: transit subsidies scale economies traffic congestion welfare effects

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Find related papers by JEL classification:
R48 - Urban, Rural, and Regional Economics - - Transportation Systems - - - Government Pricing; Regulatory Policies
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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  1. Nelson, Peter & Baglino, Andrew & Harrington, Winston & Safirova, Elena & Lipman, Abram, 2007. "Transit in Washington, DC: Current benefits and optimal level of provision," Journal of Urban Economics, Elsevier, vol. 62(2), pages 231-251, September. [Downloadable!] (restricted)
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  2. Glaister, Stephen, 1974. "Generalised Consumer Surplus and Public Transport Pricing," Economic Journal, Royal Economic Society, vol. 84(336), pages 849-67, December. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Mohring, Herbert, 1972. "Optimization and Scale Economies in Urban Bus Transportation," American Economic Review, American Economic Association, vol. 62(4), pages 591-604, September. [Downloadable!] (restricted)
  6. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, vol. 95(4), pages 1276-1289, September. [Downloadable!] (restricted)
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  7. Kraus, Marvin, 1991. "Discomfort externalities and marginal cost transit fares," Journal of Urban Economics, Elsevier, vol. 29(2), pages 249-259, March. [Downloadable!] (restricted)
  8. 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.
  9. 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. [Downloadable!] (restricted)
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