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BAUMOL’S COST DISEASE IN THE LOCAL TRANSIT SECTOR: A COMPARATIVE ANALYSISFOR GERMANY AND THE USA

Christos Evengelinos, Bernhard Wieland and Tilo Kuhnhausen

Articles, 2012, vol. 39, issue 1

Abstract: This paper examines the existence of Baumol’s cost disease in the local transit sector and its possible policy implications. Put in a nutshell Baumol’s theory contends that labor intensive, stagnant sectors of the economy will become permanently more costly relative to the other less labor intensive and technologically more progressive sectors. As a result society may have difficulties to afford the services of these sectors. Local public transport seems to be an obvious candidate for this type of industry. We perform efficiency and productivity analyses in order to test this hypothesis. Our findings confirm the existence of Baumol’s cost disease for this sector. This does not necessarily imply, however, that funding problems will increase in the future, at least as long as local transit is looked at in isolation. Funding problems may arise, though, if other stagnant sectors successfully compete for scarce public financing.

Date: 2012
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