On the topic of free transit, Matt writes:
To understand how to think about this, itâ€™s easier to start by thinking about roads. Say thereâ€™s no road between Washington, DC and Frederick, Maryland. You can go from the one place to the other, but it involves going way out of your way even though it could be a pretty quick trip on a direct road. What you need to ask yourself about building such a road is what would it cost and would it be worth it? You donâ€™t build the road expecting to turn a profit. And you shouldnâ€™t really build it expecting tolls to finance it. You should build it because you want to encourage people to drive from DC to Frederick. But if you build the road and it comes to pass that itâ€™s choked with traffic during certain periods of time you donâ€™t respond by making the road wider. Just like with building the road in the first place, you make it wider if you want to increase the number of people driving. If you want to eliminate the congestion problem, then you charge people to drive on the road during the peak times. The transit situation is similar. If you donâ€™t want people to take the Metro from Bethesda to Gallery Place, then you shouldnâ€™t build the Metro. But if you do want people to take the Metro from Betheday to Gallery Place then you shouldnâ€™t charge them to ride. But if it turns out that your route is too popular at certain times of day, then you want to charge them in order to prevent overcrowding.
That’s a compelling way of looking at things, but I’m not sure it’s quite right. The thing is, both roads and transit cost money to build, and to maintain. We need to fund them somehow. The most efficient way to fund them is to have the people who benefit from those systems pay for them.
Riders benefit from taking transit, and so they should pay to ride, whether the train is empty or not. But they’re not the only ones. Businesses benefit from transit systems (especially those operating in close proximity to stations) and so they should pay, as well. Drivers benefit from transit, because in the absence of a transit system there would be more drivers and worse congestion. Everyone in the metro area benefits from reduced pollution from transit ridership, so they should pay a little, and indeed, everyone in the world benefits from reduced carbon emissions, so technically little kids in Bangladesh should pay a fraction of a fraction of a cent toward transit. But that’s silly for a lot of reasons, so we’ll forget about that.
The same is true for roads, though because of the large negative externalities associated with driving, the balance is different — we’d expect transit riders to be subsidized on net and drivers to subsidize on net.
The obvious point that will be raised, then, is that it’s silly to force transit riders to pay when roads are free. Charging for one and not the other produces an inefficient outcome. And that leads to another interesting conclusion — if we make drivers pay for their driving, up to and including negative externalities, then driving will decline and transit ridership will increase. That will mean rising farebox revenues for transit, particularly if lines become congested, requiring peak fare increases.
So what we see is that there are two equilibria in transportation system pricing. In one, drivers and transit riders pay for the benefit of the road or transit line they use and for any social costs they impose on others. This is what we’ll call the high revenue equilibrium. Decision making in transport is largely efficient, revenue sources are efficient, and so on.
In the other equilibrium, roads are free, and so to draw riders transit systems must keep fares as low as possible. This is the low revenue equilibrium. Transportation decisions don’t reflect the benefit to user or social costs, making them inefficient. Plus, since adequate revenues can’t be raised by beneficiaries, transportation systems of both kinds must be subsidized by other revenue sources, namely, taxation, which is a much less efficient means of raising money. It also means less general revenue to go around for other priorities.
So given the very imperfect world of free roads, it seems like a decent idea to make non-congested transit routes as cheap as possible. But this is a much better alternative available, and we should do our best to make that alternative politically possible.