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Should Urban Transit Subsidies Be Reduced?

Author

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  • Ian W.H. Parry

    (Resources for the Future)

  • Kenneth A. Small

    (Department of Economics, University of California-Irvine)

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 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.

Suggested Citation

  • Ian W.H. Parry & Kenneth A. Small, 2007. "Should Urban Transit Subsidies Be Reduced?," Working Papers 060723, University of California-Irvine, Department of Economics.
    • Handle: RePEc:irv:wpaper:060723
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    File URL: https://www.economics.uci.edu/files/docs/workingpapers/2006-07/Small-23.pdf
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    References listed on IDEAS

    as
    1. Mohring, Herbert, 1972. "Optimization and Scale Economies in Urban Bus Transportation," American Economic Review, American Economic Association, vol. 62(4), pages 591-604, September.
    2. J. S. Dodgson, 1986. "Benefits of Changes in Urban Public Transport Subsidies in the Major Australian Cities," The Economic Record, The Economic Society of Australia, vol. 62(2), pages 224-235, June.
    3. Small, Kenneth A. & Gomez-Ibanez, Jose A., 1999. "Urban transportation," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 46, pages 1937-1999, Elsevier.
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    11. 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.
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    More about this item

    Keywords

    Transit subsidies; Scale economies; Traffic congestion; Welfare effects;
    All these keywords.

    JEL classification:

    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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