A New Look at the Two-Mode Problem

Marvin Kraus

No 551, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper considers the second-best policy problem that arises when auto travel is priced below its marginal cost and there is a substitute mass transit mode. We analyze the problem by combining a model of a rail line based on Kraus and Yoshida (JUE (2002)) with the highway bottleneck model. The model involves a transit authority which optimizes, in addition to the fare, two dimensions of transit capacity. These are (1) the number of train units serving the route and (2) the capacity of an individual train unit. Under a very weak condition, second-best optimality involves expanding both dimensions of transit capacity. The larger of the effects is on train size.

Date: 2002-12-17
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Published, Journal of Urban Economics, 54:3, 511-530, 2003

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