Free Transit

On the topic of free transit, Matt writes:

To understand how to think about this, it’s easier to start by thinking about roads. Say there’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 don’t build the road expecting to turn a profit. And you shouldn’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 it’s choked with traffic during certain periods of time you don’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 don’t want people to take the Metro from Bethesda to Gallery Place, then you shouldn’t build the Metro. But if you do want people to take the Metro from Betheday to Gallery Place then you shouldn’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.

Comments

  1. I have come to think that all this talk about “pricing” and “equilibrium” is just a sort of floundering by young people who grew up in a blizzard of rightwing propaganda and have no confidence in the ability of a society to govern itself.

    Take this term “equilibrium”- it implies a sort of comfortable balance where no great energy input is needed to preserve the system. But this has never been the case and probably never will be.

    We’ve heard all about how the freeways are funded by the gas tax- and now we’re hearing how we also need to spend a trillion dollars fixing them. Some equilibrium! Perpetual motion machines work too, if you continually add energy at some point.

    This rosy language of unreality is buttressed by other talking points that depend on the listener nodding in agreement. Take the idea that taxes are an inefficient way to raise money. I pay my taxes at the point of purchase or by writing a check and dropping it in the mail. How is this less efficient then creating a department of fare collection, building the machinery to collect the fares, building the stations to minimize fare avoidance, monitoring and auditing the employees who handle the money, preventing robberies, and of course requiring the riders to carry change, tokens, or prepaid passes? If that’s so efficient, why aren’t highways doing that?

    The answer is simple- now, as in all of previous history, roads, canals, bridges, railroads, and airports are built to capture the value created by society as a whole, and how that value gets captured depends much more on who you know than on what you know.

    If talking about pricing and equilibrium makes you feel good, do it. Just remember- it’s a fad.

  2. ryan says:

    These are economic terms with specific meanings. It isn’t the collection of taxes that’s inefficient, it’s the effect on behavior.

  3. Mixner says:

    Roads are not “free.” Road users pay indirect usage fees in the form of gasoline and vehicle taxes and direct usage fees in the form of tolls.

    If anyone thinks they can show that the current level of public subsidies provided to transit is justified by an equivalent public benefit (reduced pollution, reduced congestion and/or whatever else it may be), I’d love to see the analysis.

    Bewlow is a link to a Brookings Institution study comparing the public subsidies and public benefits of urban rail transit systems in the United States. The authors conclude: “We find that with the exception of BART in the San Francisco Bay area, every system actually reduces welfare and is unable to become socially desirable even with optimal pricing or physical restructuring of its network.”

    http://web.iitd.ac.in/~tripp/delhibrts/metro/Metro/on%20the%20social%20desirability-brookings.pdf

  4. BruceMcF says:

    Roads are not “free.” Road users pay indirect usage fees in the form of gasoline and vehicle taxes and direct usage fees in the form of tolls.

    Of course, the Brookings working paper generates a riddle of its own … if rail can not justify its cost, why is it necessary to quarantine passenger rail funding from highway funding and force passenger passenger rail to compete against other passenger rail projects based on benefit/cost ratios while highways are not required to meet the same standard. Surely if the benefit/cost ratio of new highway construction was superior, then the highway lobby could insist on all transit and road project funding competing on the same basis for the same pile of money, and all the money would go to roadworks.

    Ah, but its only a puzzle if one tacitly assumes that applying the analysis of the Brookings working paper to the automative transport system yields a positive social benefit.

    Now, bear in mind that Mixner has already previously conceded that roads do not even cover their aggregate infrastructure construction and maintenance outlays … and given estimates of deferred capital backlog for the road system that means that they fall even farther short of covering their full costs … let alone cover any of their public operating subsidies.

    On the rationale of the Brookings working paper cited, given the expressed demand for road services from the payments made by motorists not covering the cost of the system, the automobile transport system is not socially desirable in the aggregate.

    Indeed, given the framework, we could rapidly work out that the only part of the national transport system that has a positive social benefit is the freight rail system, since expressed market demand covers the cost of the system with a surplus for profit and property taxes.

  5. ryan says:

    Mixner, I’m familiar with Winston’s work and its flaws, notably, they don’t consider the effect of optimal pricing on competing transportation networks, which is kind of a big error. “Indirect usage fees,” quite obviously, aren’t sufficient to optimize traffic flow, and certainly don’t begin to make up for other automobile subsidies, like free parking, that lack justification.

    Transit foes lean on Winston’s work because it has that big, shiny Brookings name on it, but that doesn’t mean it isn’t junk.

  6. Mixner says:

    ryan,

    I’m familiar with Winston’s work and its flaws, notably, they don’t consider the effect of optimal pricing on competing transportation networks

    I don’t understand this comment. Perhaps you could explain how you think the effect of optimal pricing on competing transportation networks relates to their analysis.

    “Indirect usage fees,” quite obviously, aren’t sufficient to optimize traffic flow,

    I didn’t say they were. I merely pointed out that they are a form of road usage fee and as such the use of roads is not “free.”

    and certainly don’t begin to make up for other automobile subsidies, like free parking, that lack justification.

    If driving benefits from unjustified subsidies, then those subsidies should be eliminated. The same is true for transit, of course. Public subsidies currently pay for over two-thirds of transit costs. Fares cover less than a third. If you think you have a serious, quantitative analysis of costs and benefits that shows this enormous level of subsidy to be justified, I’d like to see it.

  7. ryan says:

    This is consistent with a number of other studies on the subject. With regard to your first question, cross-price elasticity of demand makes me think it relates.

  8. Mixner says:

    ryan,

    This is consistent with a number of other studies on the subject.

    The study you link to addresses only the continuation of operating cost subsidies for three transit systems that are already built. It ignores the capital infrastructure costs of those systems. The only question it addresses is whether keeping those systems running through subsidies is justified given that constructing them is a sunk cost that cannot be recovered. It is silent on the question of whether such subsidies would be justified if the systems had not already been built.

    It also examines only three transit systems with very large passenger volumes, which casts doubt on the applicability of its results to transit in general.

    With regard to your first question, cross-price elasticity of demand makes me think it relates.

    Sorry, that doesn’t make it any clearer. Could you clearly describe the basic flaw you see in their analysis?

  9. AC says:

    Mixner, Winston claims that NYC’s mass transit system provides only $1.3 billion in congestion-related benefits from taking traffic off the streets. Check that against your common-sense. Imagine that NYC’s rail transit shut down, forcing everyone to drive, walk or bike to work. Do you think the economic loss to NYC — the direct and indirect costs of all that extra congestion — would be just $4 million per day?

    Oh, wait, we don’t have to imagine. NYC transit workers struck in 2005. The city estimated its economic damage at $400 million for the first day, and predicted $300 million per weekday after riders had a chance to adjust to the strike. That number is 100 times Winston’s estimate, and sounds a lot more plausible to me. http://www.ny1.com/Default.aspx?SecID=1000&ArID=55772

  10. Gee, Ryan, excuse me for living, but I was responding to your description of “taxation, which is a much less efficient means of raising money”.

    But let’s imagine for a minute that we really are talking about using taxation to influence behavior. That’s what we’ve done with the roads- we collect money in taxes, build roads, and people use them for “free”. In a very narrow sense this is an inefficient way to winnow the chaff from the grain, but it sure influences behavior! Arguably, a lot of people using the road would be financially better off if there were no road and they had to adopt different behaviors, but the lure of the “free” road is very strong.

    My main point, though, is that the language of economics doesn’t work very well with transportation. Transportation involves absolute tons of stuff like natural corridors, right-of-ways built by one user and now used by another, waterways that can’t be blocked by low-level bridges, industries with powerful lobbyists in the statehouse, etc. Almost none of this stuff acts as predictably as a gas, and modeling the atmosphere on computers is almost child’s play compared with modeling transportation systems.

    Fortunately, there is the other hand, with which people make decisions based on what they want, and to hell with the price. (I say ‘fortunately’ because it’s hard to tell, looking backwards, just where would have been a more comfortable place to stop innovating and let prudent investments rule the roost.)

    Well enough of this, things to do. Just a little food for thought.

  11. Mixner says:

    AC,

    Mixner, Winston claims that NYC’s mass transit system provides only $1.3 billion in congestion-related benefits from taking traffic off the streets. Check that against your common-sense.

    I see no conflict between their estimate and common sense. Not that common sense is a reliable guide to complex statistical questions anyway. The authors note that the congestion cost function they are using is the standard formula from the Urban Transportation Planning Program package provided by the U.S. Department of Transportation to state and local agencies. They also note that the New York subway ridership has a uniquely large share of non-commuters (57%, compared to around 20% for other rail systems). This will tend to reduce the congestion-relief benefit of the NY subway in comparison to other rail systems, since non-commuters are less likely to travel at times of peak congestion. Your criticism amounts to “It doesn’t seem right to me,” which is not exactly a persuasive critique.

    The city estimated its economic damage at $400 million for the first day

    Also pretty meaningless. The article attributes that estimate to the city comptroller’s office. There’s no information about how the estimate was produced. For all you know the comptroller just made up that number out of thin air. He also had a political incentive to exaggerate the cost of the strike. And you’re making an apples-to-oranges comparison anyway. The strike shut down all the MTA buses as well as the subway. The Winston & Maheshri study is about rail transit only, not bus transit. In the absence of the subway, we would expect much higher bus ridership (as well as much more use of carpooling, telecommuting, staggered work schedules and other common methods of relieving congestion).

  12. AC says:

    One cost of congestion is the value of time wasted stuck in traffic. Other costs of congestion are having to participate in a conference by phone when you would rather be there in person, or having to leave for work at 6 a.m. when you’d rather leave at 7 a.m., or not going to the Mets game at all because it is now just too much trouble. Still another cost of congestion is a business manager having to juggle staggered employee schedules because they cannot all work at the same time.

    Do you know whether Winston & Maheshri included all of these costs? Or did they just estimate the extra time stuck in traffic? I suppose I could do some research to locate their congestion cost function, but I’m not the one pushing the paper.

    Your criticism amounts to “It doesn’t seem right to me,” which is not exactly a persuasive critique.

    It’s not so much a “critique” as a reason for being skeptical and demanding proof. Merely assuring us that they really did calculate something isn’t enough.

  13. Mixner says:

    AC,

    As I said, W&M report that they used the standard congestion cost function from the USDOT’s Urban Transportation Planning Program package provided to state and local agencies. If you think this function seriously understates the true costs of congestion you are welcome to propose an alternative function and explain why you think your alternative is better.

    Of course, similar questions could be asked about any proposed cost or benefit of any mode of transportation. Are you similarly suspicious that standard government formulas understate the true costs of transit or exaggerate the true benefits?

    I don’t know what you mean exactly by “pushing” the W&M paper. I offer it as an example of academic research that casts serious doubt on the claim that the vast public subsidies provided to transit (around 72% of total costs) are justified. It seems to me that the burden of proof is on defenders of those subsidies to make that case, not on skeptics like me to disprove it.

  14. BruceMcF says:

    Mixner, February 11th, 2009 at 11:21 pm

    ryan:
    I’m familiar with Winston’s work and its flaws, notably, they don’t consider the effect of optimal pricing on competing transportation networks

    I don’t understand this comment. Perhaps you could explain how you think the effect of optimal pricing on competing transportation networks relates to their analysis.

    We know from the theory of the second best that optimizing a part of a system while leaving the rest of the system suboptimal does not necessarily give the second best outcome in the sense of the best outcome for the system as a whole given the suboptimal part.

    In order for the argument you are adopting from W&M’s working paper to be valid, it is necessary that no other important part of the transport system is excessively subsidized. W&M do not even address the issue, so you don’t even have the “appeal to the authority of a working paper” recourse … you have to establish that on your own, if you wish to bring that working paper in support of your argument.

  15. dcpatton says:

    Are there any countries where transit and road networks are both fully funded by usage fees?

    It would be interesting to see what the public would choose if there was true competition with no government subsidies.