The Case for Subsidisation of Urban Public Transport and the Mohring Effect
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
Volume (Year): 44 (2010)
Issue (Month): 3 (September)
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