Thursday, June 27, 2013

The Problem of Public Transit Pricing

Like many Americans I often begin my work day with public transportation.  I'd like to claim that I ride the bus because of a sense of environmental duty, but the fact is it's simply cheaper than driving these days.  Assuming I use the bus two hundred times this year (one hundred days round trip) my cost per ride will be approximately thirty cents per ride. Given current gas prices it's clear the bus is a cheaper choice for me even before even factoring in maintaining my vehicle, convenience, and parking costs.  But what is the ideal price for the transit system to charge me?

Let's get this out of the way first. Public Transit systems do not pay for themselves. Almost universally fares do not meet or exceed the costs of operation (the exceptions being highly populated areas of East Asia.) Generally speaking, fares recover less than half of operating expenses for public transit. Therefore, if you believe that cities should have some sort of public transit system the question becomes not "Should the public pay for public transit?" but "How much should the public pay for public transit?"  The former question for the sake of brevity is simply going to be assumed to be "Yes." for the purposes of this posting.

How much to charge riders is actually a very difficult problem.  Before getting into specific prices let's look at what public transit does well and where it fails.

A full bus or train generates less pollution than a analogous set of cars for it's riders. This difference is magnified when considerations are given to cities movements towards hybrid buses and bus riders tendency towards older, less efficient cars. After all, few people buy a brand new car so they can then ride the bus every day.

Public transit helps provide transportation options for the elderly, disabled, young and poor who might not otherwise be able to travel to necessary locations.  A less fortunate individual who can not afford a car still requires the ability to retrieve food and attend work.  Failing to provide that option simply discourages them from providing for themselves and places the burden of their livelihood on society.

Public transit helps to alleviate road congestion, reduces wear and tear on roads, and reduces expenditures on scarce fossil fuels.

Clearly public transport has a lot of societal benefits.  But what problems are there?

At times public transport can certainly be less comfortable than a personal vehicle. Anyone who frequents public transportation has experienced the occasion of being forced to sit or stand next to an individual they'd rather avoid.  Further, at peak times overcrowding can be an unpleasant inconvenience.

Now let's move to the issue of pricing. There are several abstract price breakpoints that merit discussion. Let's refer to them as break even, cost per rider, nearly free and free. I'll define each as they're discussed.

The highest price would be the break even price.  This is the price the transit district would charge in order to recoup all operating costs. For a variety of reasons this is not a very rationale amount to charge while driving remains a reasonable option. The higher the amount charged the larger the portion of people that will find a transportation substitute.  This burdens the remainder of the customers with a larger portion of the fixed costs of operation thus causing again more to leave the system. This feedback loop continues until you're left with relatively few people paying a relatively high cost.  The same feedback is observed when examining riders who choose to use the service but not pay. The end result is honest users must either pay a great deal or use other options, and most choose to use other options. It is certainly not an optimal price unless there are no practical transport substitutes available.

The second highest price is the cost per rider. This price calculates the cost to take a rider from point A to point B and charges them that price.  It's superior to the break even price in that a rider isn't burdened by the cost of compensating for those who choose not to pay. This level of pricing tends to recoup approximately 50% of operating costs.  The unrecovered costs are lost due to individuals who do not pay and subsidized fares (for the poor, students, disabled and elderly primarily).

The nearly free pricing model has a few interesting points. First of all, it prices a ride well within the means of the majority of society.  In this case the cost of a ride is primarily psychological.  In Champaign-Urbana the most you will pay for a bus ride is one dollar.  This is an amount most people can manage with relative ease. However, the mental obstacle of "payment" certainly remains, particularly for first time riders. While a relatively minor concern, the possibility of being stranded away from home without needed payment must discourage some potential riders.

At this price essentially anyone can use the bus if they have need or desire.  Regardless, a great many people avoid it due to the "cost" involved. This price point has a great deal of access while still reducing crowding somewhat. However, there are several notable downsides. This price still requires the purchase, operation and maintenance of a costly payment network. In other words, you still have to collect fares and sell tokens/passes/etc.  Fare collection has significant costs both in terms of capital expenditure to build the network and time expended by employees to do the sales and collection. Additionally, if the goal is to get the public to use public transit then the question of "Why impose a pay barrier?" seems relevant.

Lastly is the free price point. At this point all non-geographic barriers are removed.  If you can get to a transit stop you can board without payment.  As discussed above this reduces infrastructure and employee costs somewhat.  However, it also greatly increases utilization which may lead to a less comfortable environment for everyone. Particularly during peak hours under a free model congestion can become problematic.

I have also heard the argument of "If transit is free then it will be overrun with the homeless and criminal." It is a point which I believe has little merit.  Firstly, how else are the homeless supposed to achieve housing for themselves if they cannot find and attend a job? To complain about the homeless while at the same time eliminating the potential for them to lift themselves off the streets seems ludicrous.

I propose this solution.  During peak hours of use charge at a nearly free price point. The remainder of the time operate the transit system for free.  This will help alleviate congestion when it is worst and still provide easy access to transportation to those who need it most. An unemployed man trying to get to his job interview can choose to pay a small fee to arrive during peak hours, or arrive early for free.  Meanwhile the successful lawyer who just hates trying to find a parking spot downtown can ride in relative comfort during peak hours for a cost which is trivial to him.

There is of course an increased tax burden on society. However, there are a great deal of rewards as well. Less traffic jams, lower road maintenance costs, decreased wealth transfer payments (welfare), better air quality, increased road safety, increased tax revenue and more efficient use of energy resources are only a few examples.  The only question is if individuals can stomach giving strangers a free ride (literally).

More economics next week. Until then stay safe and rationale.

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