Public Transportation Economics 312 Martin Farnham
Introduction Public transit used by 10.5% of Canadians to get to work in 2001 According to Canadian Urban Transit Association (Bombardier funded) 30% in metro areas use transit regularly. This figure probably high; car still dominates What are determinants of transit use? Private cost of travel: Price of fare plus time cost (time cost of ride plus time cost of getting to ride) Cost of alternative travel (car); e.g. if congestion is bad or gas prices are high, cost of driving is high-- makes transit more appealing
Who Rides Transit? People with low opportunity cost of time (low wages) People in cities Expensive to own car in city (high insurance, parking costs) Much is available by foot in city (don t need to drive for groceries) Public transit relatively convenient in city (stops generally close to work and home)
Travel Mode Choice Travel to work involves three parts Collection phase: getting from home to your ride Line-haul phase: riding Distribution phase: getting from your ride to work (or other destination) Auto tends to be fastest for all three phases; though trains may be quicker on line-haul phase (especially if they run express)
Travel Mode Choice Transit systems face trade offs in serving customers Adding more stops lowers collection, distribution costs; raises line-haul costs Can have more stops without raising line-haul costs, but only if you employ more vehicles This increases costs and hence fares New York subway offers system of local and express service. Lots of local stations; occasional express ones. People collect and distribute at local stops, but then switch to express trains for quicker line-haul travel
What Would Induce a Driver to Switch to Transit? Subsidies to transit Flip side of this is taxes on driving (congestion tax, gas tax, parking tax, etc.) Wage decline The value of your time is a function of what you can sell it for Lower wage makes people less concerned about travel time Improvements in travel time of transit relative to cars Flip side of this is if car becomes relatively less convenient (or more expensive)
Choosing Transit System (Planner s Problem) There exist many possible ways for people to get around Road system Bicycle path system Bus system Light rail system Heavy rail system Subway system Each is expensive; doesn t make sense to have all of them
Planner s Modal Choice Transportation planner needs to choose optimal configuration This will generally involve mix of car, bus, and rail Different forms of public transport may complement each other Local buses transport commuters to express trains, etc. Planner should pick configuration that minimizes social cost (sum of private and external travel costs)
Determinants of Costs of Different Systems Auto Gas and other operating costs (for drivers) Pollution costs (high) Time costs Road costs (can be financed with congestion tax) Bus Administration costs Capital (buses) Operation costs (fuel, labour)
Determinants of Costs of Different Heavy rail Systems Administration costs Capital costs (VERY HIGH) Operating costs Pollution costs Need lots of passengers to bring average cost down to feasible amount
Determinants of Costs of Different Systems For low volume of traffic, car system is cheapest Requires no administrative costs Roads can be expanded as needed, using congestion tax Collection and distribution costs of car travel will be much cheaper than other modes if volumes are small
Determinants of Costs of Different Systems For higher volumes of traffic, bus system is cheapest High fixed costs make it cost ineffective for small volumes (small towns) As fixed costs are spread, becomes less costly than car Also, as volume increases, number of stops can increase (lowers collection and distribution costs); waits between buses can decrease
Determinants of Costs of Different Systems Heavy rail is only cost effective for very high volumes of traffic Need to spread administrative costs High capital cost means lots of fixed costs to spread (need high volume) Light rail increasingly popular Edmonton, Calgary, Vancouver, Scarborough have LR systems Higher capital costs than bus system, but lower than heavy rail Higher operating cost than bus; higher collection and distribution costs
Determinants of Costs of Different Systems Does general pattern of transit seem consistent with this? Small towns use just cars and roads Medium sized towns have bus systems Only large cities have rail systems Note: all cities still use cars, though planners may downplay their role
Why Subsidize Mass Transit? Externalities If more people ride transit, congestion on roads is reduced; sometimes makes sense to subsidize positive externalities Natural monopoly Rail systems are natural monopolies Competition would be too expensive Given incentives of monopolist (to produce less than social optimum), makes sense to subsidize them (to induce the social optimum)
Why is Transit a Natural Monopoly? Because of the large network of rails, and rights-of-way needed, there are large scale economies in rail transit LRAC curve is ever-decreasing LRMC curve is ever-decreasing; lies below LRAC curve Means that if the firm sets P=MC, it will earn negative profits, because P will be less than AC Social optimum cannot be achieved by market A subsidy can fix the problem
Recall that Profit-Maximizing Firms Produce where MR=MC Assuming monopolist can t price discriminate (one-price monopolist), sets MR=MC (at R ) This is too little output relative to social optimum Govt. would like to force monopolist to produce where P=MC (at R*) But profits will be negative at that point (characteristic of nat l monopoly) One option is to force the monopolist to increase output until profits=0. Monopoly Production P P LRAC* P* MR D=MSB R R* LRAC LRMC Rides
Subsidizing Monopolist Here monopolist could earn zero profits at (R,P ); still not socially optimal (MB>MC) Can t force firm to produce any more (firm will exit if it s forced to earn negative profits City can make up difference between P* and LRAC at R* (transit subsidy) Ride subsidy: s=lrac*-p* Guarantees zero profits (so firm won t exit) and puts us at social optimum! Transit subsidy for natural monopoly P P P LRAC* P* MR D=MSB R Shaded area: Total Govt Outlay R R* LRAC s LRMC Rides
Public Transit and Land Use Commuting costs affect relative desirability of locations near and far from employment Higher commuting costs lead people to prefer living closer to work Consider two things that affect commuting costs Price of gas Price of public transit
Public Transit and Land Use Increase in gas price Raises commuting costs; might lead people to live closer to work But there are other ways people can respond Buy smaller cars, carpool, ride transit Cost of gas may be small enough part of people s budget that gas prices don t have large effect on land use patterns
Public Transit and Land Use Introduction of commuter rail (to metro area) Empirical studies suggest main effect is to increase employment downtown Introduction of BART in San Francisco grew downtown employment; little effect on employment near suburban stations Similar results in Atlanta Changing employment patterns takes time; office buildings don t go up overnight Probably unrealistic to expect big population shifts around transport changes to occur quickly.