Should Urban Transit Subsidies Be Reduced?

Ian Parry () and Kenneth A. Small ()

No 60723, Working Papers from University of California-Irvine, Department of Economics

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.

Keywords: Transit subsidies; Scale economies; Traffic congestion; Welfare effects (search for similar items in EconPapers)
JEL-codes: R48 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-geo and nep-ure
Date: 2007-05
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http://www.economics.uci.edu/docs/2006-07/Small-23.pdf (application/pdf)

Related works:
Working Paper: Should Urban Transit Subsidies Be Reduced? (2007)
Journal Article: Should Urban Transit Subsidies Be Reduced? (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:irv:wpaper:060723

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