Public Transport Economics
Public Transport Economics
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Public transport is the most widely used mode of travel in many dense cities around the world, including my hometown, Budapest. It is one of the oldest forms of transport and an early example of what is now often referred to as the sharing economy. Effective public transport requires a high level of organisational coordination, which is why it is often regulated or directly operated by public agencies.
The core questions of transport economics apply in this context as well:
How much public transport should be provided? What combinations of network layout, service frequency and vehicle size ensure the most efficient use of shared resources?
What level of public transport use is desirable from a societal perspective, and what incentives are needed to achieve it?
To address these questions, public transport economics places strong emphasis on pricing decisions. Pricing is treated primarily as a tool for managing demand rather than simply a source of funding. Through well-designed pricing policies, we can influence usage levels across the different markets served by public transport. This literature also examines the appropriate mix of funding sources, including public subsidies. However, it argues that funding decisions should be derived from optimal pricing strategies, while taking external funding constraints into account.
Public transport economics is closely linked to several related subfields within transport research. Understanding travel behaviour is essential to any economic analysis and connects directly with demand modelling. Supply-side decisions are shaped by the technical constraints of service provision, linking the field to transport engineering and operations research. Decisions in public transport also have significant implications for income distribution and social equity, highlighting the need for interdisciplinary work with the social sciences and humanities. Finally, to ensure that theoretical insights inform real-world policy, the field draws heavily on statistics and data science. Public transport policy is one of the most data-rich areas in spatial analysis, offering exciting opportunities for empirical research at scale.
Key Messages
Key Messages
In simple terms, we build models to determine the socially optimal pricing and capacity of public transport services. What effects do we typically consider?
Economies of scale
Economies of scale
Public transport becomes more cost-effective as ridership increases. This is due to both technological and service-related factors. Larger vehicles carry more passengers at lower average operating and environmental costs. High demand also leads to denser networks and more frequent services, reducing walking distances, waiting times and the number of transfers. Microeconomic theory indicates that the optimal price of a service operating under economies of scale should be lower than its marginal cost. This is one of the main reasons why economists support partially (though not necessarily fully) subsidised public transport.
Crowding as an externality
Crowding as an externality
Transport capacity is limited, especially during peak periods and in busy sections of the network. Over the past two decades, research has developed robust methods to quantify the discomfort caused by crowding in monetary terms. When travelling in a crowded environment, passengers not only experience inconvenience themselves but also impose discomfort on others. Economic theory suggests that extenalities, including this, should be reflected in the fare. On the other hand, when services run with ample capacity in off-peak times, there is no justification for high fares. As a result, we often advocate for spatial and temporal fare differentiation based on occupancy levels.
Substitution with other modes
Substitution with other modes
Cheap public transport fares are sometimes proposed as a response to the overuse of cars in urban settings, where the private cost of driving is much lower than the social cost. This can be supported by economic theory to some extent, but the size of the subsidy depends on two factors: the size of the external cost gap in car use and the level of substitutability between cars and public transport. Unfortunately, substitution between these modes is often weak. Public transport also competes with walking, cycling and micromobility options. Taking all of this into account, my view is that the degree to which very low fares can be justified is often overestimated by both professionals and activists.
Costly public funds
Costly public funds
As mentioned earlier, pricing in public transport serves primarily to manage demand. However, we cannot ignore the source of funding. Using road taxes to fund public transport is a sound approach. In practice though, much of the funding comes from other sources, such as income taxes, which can distort incentives, for example by discouraging labour supply. Our models take these broader fiscal effects into account when estimating optimal fares.
Agglomeration economies
Agglomeration economies
Improved connectivity makes both firms and workers more productive. This well-documented externality of mobility supports the case for lower fares and stronger public subsidies. According to microeconomic principles, prices should reflect the externalities of use—positive as well as negative.
Equity and social acceptance
Equity and social acceptance
Public transport policy often faces the classic equity-efficiency trade-off. Lowering fares is not a targeted way to support low-income groups, as wealthier individuals also use these services and not all low-income people rely on public transport to the same extent. More precise redistribution goals can be achieved through targeted discounts based on socioeconomic characteristics. However, even well-designed policies can fail if they lack public support. This often happens when the benefits are poorly communicated or appear to favour only a minority. Public understanding is essential, and this remains a major challenge for transport economists.
There is one point that the list above clearly demonstrates: the economics of public transport provision is a multi-faceted domiain where models, data and expertise are necessary to make informed decisions. Unfortunately, public transport is becoming a central theme in identity politics and culture wars these days. In this environment, I often find that education and communication are among the most valuable contributions a transport economist can make; sometimes even more so than pushing the research frontier.
Our Contributions
Our Contributions
In the rest of this page, a selected list of my publications in public transport economics is provided, with their abstracts and DOI links. The papers are grouped into four subjects.
For the full list of my academic publications, follow this link or 'Publications' in the menu bar.
- Reviews
'A review of public transport economics' in Economics of Transportation, with Alejandro Tirachini
Public transport provision requires substantial organisational efforts, careful planning, financial contributions from the public, and coordination between millions of passengers and staff members in large systems. Efficient resource allocation is critical in its daily operations. Therefore, public transport has been among the most popular subjects in transport economics since the infancy of this discipline. This paper presents an overview of the literature developed over the past half century, including more than 300 important contributions. With a strong methodological orientation, it collects, classifies, and compares the frequently used analytical modelling techniques, thus providing a cookbook for future research and learning efforts. We discuss key findings on optimal capacity provision, pricing, cost recovery and subsidies, externalities, private operations, public service regulation, and cross-cutting subjects, such as interlinks with urban economics, political economy, and emerging mobility technologies.
https://doi.org/10.1016/j.ecotra.2021.100196
'Public transport: design, scale, and pricing' in the Handbook on Transport Pricing and Financing, with Sergio Jara-Díaz and Antonio Gschwender
This chapter builds on the welfare economic theory of transport pricing and its application to public transport supply. In this approach, optimal fares are set to reflect the marginal welfare effect of travelling. The unique engineering characteristics of operator and user costs in public transport make an increase in demand have a positive impact on the frequency, directness, and density of transit lines, along with their effect on waiting, in-vehicle and access times. Because of these scale economies optimal design makes first-best prices fall short of operators’ costs inducing optimal subsidies, and sub-optimal pricing induces sub-optimal designs. The discussion is extended to the wider socio-economic context in which public transport operates, by looking at second-best pricing considering intermodal substitution, and by discussing the role of public funds, equity, social acceptance, political institutions, and environmental resources. The chapter advocates a more active interplay between quantitative economic analysis and practical policy decisions on pricing in public transport.
2. Crowding cost estimation
2. Crowding cost estimation
'Crowding cost estimation with large scale smart card and vehicle location data' in Transportation Research Part B: Methodological, with Dan Graham and Richard Anderson
Crowding discomfort is an external cost of public transport trips imposed on fellow passengers that has to be measured in order to derive optimal supply-side decisions. This paper presents a comprehensive method to estimate the user cost of crowding in terms of the equivalent travel time loss, in a revealed preference route choice framework. Using automated demand and train location data we control for fluctuations in crowding conditions on the entire length of a metro journey, including variations in the density of standing passengers and the probability of finding a seat. The estimated standing penalty is 26.5% of the uncrowded value of in-vehicle travel time. An additional passenger per square metre on average adds 11.9% to the travel time multiplier. These results are in line with earlier revealed preference values, and suggest that stated choice methods may overestimate the user cost of crowding. As a side-product, and an important input of the route choice analysis, we derive a novel passenger-to-train assignment method to recover the daily crowding and standing probability pattern in the metro network.
https://doi.org/10.1016/j.trb.2016.10.015
'A dynamic choice model to estimate the user cost of crowding with large-scale transit data' in the Journal of the Royal Statistical Society Series A: Statistics in Society, with Prateek Bansal and Dan Graham
Efficient mass transit provision should be responsive to the behaviour of passengers. Operators often conduct surveys to elicit passenger perspectives, but these can be expensive to administer and can suffer from hypothetical biases. With the advent of smart card and automated vehicle location data, operators have reliable sources of revealed preference (RP) data that can be utilized to estimate transit riders’ valuation of service attributes. To date, effective use of RP data has been limited due to modelling complexities. We propose a dynamic choice model (DCM) for population-level longitudinal RP data to address prominent challenges. In the DCM, riders are assumed to follow different decision rules (compensatory and inertia/habit) and temporal switching between decision rules based on experience-based learning is also formulated. We develop an expectation–maximization algorithm to estimate the DCM and apply our model to estimate passenger valuation of crowding. Using large-scale data of 2 months with over four million daily trips by an Asian metro, our DCM estimates show an increase of 47% in passenger’s valuation of travel time under extremely crowded conditions. Furthermore, the average passenger follows the compensatory rule on only 25.5% or fewer trips. These results are valuable for supply-side decisions of transit operators.
3. Pricing and capacity models
3. Pricing and capacity models
'Demand imbalances and multi-period public transport supply' in Transportation Research Part B: Methodological, with Dan Graham
This paper investigates multi-period public transport supply, i.e. networks in which capacity cannot be differentiated between links and time periods facing independent but nonidentical demand conditions. This setting is particularly relevant in public transport, as earlier findings on multi-period road supply cannot be applied when the user cost function, defined as the sum of waiting time and crowding costs, is nonhomogeneous. The presence of temporal, spatial and directional demand imbalances is unavoidable in a public transport network. It is not obvious, however, how the magnitude of demand imbalances may affect its economic and financial performance. We show in a simple back-haul setting with elastic demand, controlling for total willingness to pay in the network, that asymmetries in market size reduce the attainable social surplus of a service, while variety in maximum willingness to pay leads to higher aggregate social surplus and lower subsidy under efficient pricing. The analysis of multi-period supply sheds light on the relationship between urban structure, daily activity patterns, and public transport performance.
https://doi.org/10.1016/j.trb.2017.12.009
'MaaS economics: Should we fight car ownership with subscriptions to alternative modes?' in Economics of Transportation, with Dan Graham
Proponents of the Mobility as a Service concept claim that subscriptions to alternative modes can effectively reduce car ownership and the adverse effects of underpriced car use. We test this hypothesis in a microeconomic model with endogenous mode choice as well as car and subscription ownership. The model contains congestible urban rail and car sharing options as substitutes of underpriced private car use. We find that aggregate car ownership is not a reliable proxy for road congestion: subscriptions may reduce car ownership while increasing the vehicle miles travelled by remaining car owners. Subscriptions induce welfare losses for two reasons. First, pass holders overconsume the alternative modes, as the marginal fare they face drops to zero. Second, non-pass holders tend to shift to car use due to the crowding induced by pass holders, causing additional distortions. We illustrate numerically that differentiated pricing is more efficient in achieving the goals of MaaS.
https://doi.org/10.1016/j.ecotra.2020.100167
'The Gini index of demand imbalances in public transport' in Transportation (Springer), with Dan Graham
The paper studies a general bidirectional public transport line along which demand varies by line section. The length of line sections also varies, and therefore their contribution to aggregate (line-level) user and operational costs might be different, even if demand levels were uniform. The paper proposes the Gini index as a measure of demand imbalances in public transport. We run a series of numerical simulations with randomised demand patterns, and derive the socially optimal fare, frequency and vehicle size variables in each case. We show that the Gini coefficient is a surprisingly good predictor of all three attributes of optimal supply. These results remain robust with inelastic as well as elastic demand, at various levels of aggregate demand intensity. In addition, we find that lines facing severe demand imbalances generate higher operational cost and require more public subsidies under socially optimal supply, controlling for the scale of operations. The results shed light on the bias introduced by the assumption of homogeneous demand in several existing public transport models.
https://doi.org/10.1007/s11116-020-10138-4
'The economics of seat provision in public transport' in Transportation Research Part E: Logistics and Transportation Review, with Dan Graham
Seated and standing travelling imply significantly different experience for public transport users. This paper investigates with analytical modelling and numerical simulations how the optimal seat supply depends on demand and supply characteristics. The paper explores the implications of seat provision on the marginal cost of travelling as well. In crowded conditions, we distinguish two types of external costs: crowding density and seat occupancy externalities. We derive, using a realistic smart card dataset, the externality pattern of a metro line, and identify the distorting role of the occupancy externality that makes the welfare maximising fare disproportionate to the density of crowding.
4. Wider economic interactions
4. Wider economic interactions
'Public transport provision under agglomeration economies' in Regional Science and Urban Economics, with Woubit Seifu, Bruno De Borger and Dan Graham
The purpose of this paper is to investigate, using both theoretical and numerical analysis, the impact of agglomeration externalities on short-run policy decisions in public transport, i.e. socially optimal pricing, frequency setting, and subsidisation. We develop a simple two-mode model in which commuters can opt for car or public transport use; car use leads to congestion, and public transport is subject to crowding. Allowing for agglomeration externalities, we show the following results. First, if car use is correctly priced for congestion, agglomeration benefits imply substantially lower public transport fares and higher frequencies. They neutralise to some extent the pressure to increase fares to correct the crowding externality. Second, as a consequence, agglomeration benefits justify low cost recovery ratios in public transport. Assuming an agglomeration elasticity of 1.04, a value well within the range of reported elasticities, numerical implementation of the model finds that cost-recovery ratios are 35.8% lower than in the absence of the productivity externality. Third, interestingly, the effect of agglomeration benefits on fares and frequency is much smaller if road use is exogenously under-priced. In this case, any modal shift induced by lower public transport fares has opposing agglomeration effects on the two modes, since agglomeration benefits are not mode-specific.
https://doi.org/10.1016/j.regsciurbeco.2019.103503
'Subsidised transport services in a fiscal federation: Why local governments may be against decentralised service provision' in Economics of Transportation, with Bruno De Borger and Dan Graham
In this paper we consider a fiscal federation and study the effects of decentralised provision of loss-generating public services with benefit spillovers to other regions. We use public transport provision across administrative borders as a prototype example. We show in a formal model that local governments might be better off when a higher-level government or a neighbouring region provides these services, and even privatisation to a monopolist can be preferred over decentralisation. Our model reveals that these results are governed by a variant of the tax exporting mechanism that applies to subsidised services, i.e., the possibility that local consumers can exploit spillover benefits without contributing to the subsidy burden of service provision. Public transport provision is one of the large sectors of public policy where decentralisation could provide social benefits, but, as the paper reveals, the need for subsidies generates a genuine conflict of interest between the governments involved.
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