How much should bus tickets cost?

Thinking about optimal public transport subsidies is a tricky business, since there are so many factors to be taken into account. Trains and buses are less polluting and cause less congestion, but they’re also slower and less direct.

But according to a paper just published in the American Economic Review, when you put all the factors together, it looks like public transport merits a high subsidy – over 50% in the case of DC, LA and London. Their results would likely apply to Sydney too, though the right subsidy would be smaller for a spread-out city like Canberra.

Should Urban Transit Subsidies Be Reduced? (gated published version, working paper version)
By Ian W. H. Parry and Kenneth A. Small
This paper derives empirically tractable formulas for the welfare effects of fare adjustments in passenger peak and off-peak rail and bus transit, and for optimal pricing of those services. The formulas account for congestion, pollution, accident externalities, scale economies, and agency adjustment of transit service offerings. We apply them using parameter values for Washington (DC), Los Angeles, and London. The results support the efficiency of the large current fare subsidies; even starting with fares at 50 percent of operating costs, incremental fare reductions are welfare improving in almost all cases. These findings are robust to alternative assumptions and parameters.

Sensibly enough, the authors don’t account for distributional issues in their analysis, since economists generally take the view that that the tax-transfer system is a better and fairer way to help the poor than subsidised services.

3 thoughts on “How much should bus tickets cost?”

  1. I haven’t had a chance to look at the paper yet (I can’t seem to access the WP link).
    But wouldn’t the optimal subsidy depend on the pricing of alternative transport, such as car transport. Since we impose a higher tax on petrol than in the US, won’t our optimal public transport subsidies be lower?


  2. And further to Matt C’s point – when carbon externalities are priced by either carbon taxes or an ETS, the portion of the public transport subsidiy related to that should be removed. In London, which has congestion charging in place, cars face higher taxes through that channel as well. I wonder also whether they take into account implicit “time” subsidies (bus lanes) and favourable access in many cases to city centres (compare this with parking charges).


  3. Andrew,
    Something I have been tossing around as an idea (or more of a question) is whether a largery subsidy on monthly, quarterly or annual tickets might be the way to go.  If these were discounted further by say 20, 30 and 50% respectively on their prices, it should have a couple of beneficial effects.  Firstly, the up front investment by individuals means they are more likely to use the transport to get their value for money, secondly, it makes public transport far more eco0nomical comparred to cars, and thirdly, it gives the Government more up front cash to spend or invest and then send.  If this subsidy was provided by the Cth ( funded for example from CPRS permit revenue) as a rebate to the State for each ticket sold (ie consumer pays discounted amount but State receives additional rebate from Cth), the State would get the current ticket prices and not have to fund the subsidy.
    I’m sure there are holes in the idea but what do you think?


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