Should Urban Transit Subsidies Be Reduced?

49 Pages Posted: 18 Jul 2007 Last revised: 9 Nov 2008

See all articles by Ian W. H. Parry

Ian W. H. Parry

Resources for the Future

Kenneth A. Small

University of California, Irvine - Department of Economics

Date Written: July 1, 2007

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 applied across mode, period, and city. In almost all cases, fare subsidies of 50 percent 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

JEL Classification: R48, H21

Suggested Citation

Parry, Ian W. H. and Small, Kenneth A., Should Urban Transit Subsidies Be Reduced? (July 1, 2007). Available at SSRN: https://ssrn.com/abstract=1001430 or http://dx.doi.org/10.2139/ssrn.1001430

Ian W. H. Parry (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5151 (Phone)
202-939-3460 (Fax)

HOME PAGE: http://www.rff.org/~parry

Kenneth A. Small

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States
714-824-5658 (Phone)
714-824-2182 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
255
Abstract Views
4,114
rank
120,859
PlumX Metrics