Mass Transit: Could Raising Fares Increase Ridership?

mass transit bus, madison.jpg

Conventional wisdom dictates that keeping transit fares as low as possible will promote high ridership levels. That isn't entirely incorrect. Holding all else constant, raising fares would have a negative impact on ridership. But allowing the market to set transit fares, when coupled with a number of key reforms could actually increase transit ridership, even if prices increase. In order to implement these reforms, we would need to purge from our minds the idea that public transit is a welfare service that ought to be virtually free in order to accommodate the poor. Concern about poverty should drive welfare policy, not transit policy. Persistent efforts to keep public transit fares as low as possible are a big part of the reason that public transit ridership in North America has hit record lows. To increase ridership, transit agencies have to convince people who can afford to drive that transit is a better option. Convenience, and not lower prices, is the key.

There are three basic reasons that private automobiles have virtually crowded out transit. First, private automobiles are inherently more convenient for a large segment of the population. Transit routes are naturally limited to well-traveled corridors, which are often slower because of wait and stop times. On the other hand, you can get into your car and immediately take the most efficient route to your destination.

The second factor is free roads. While people do pay for roads, they don't pay for using specific roads at specific times. Gas taxes go into general revenues, and road construction and repair isn't directly connected to usage. As a result, a large percentage of roads are subsidized by travelers who use a small percentage of highly traveled routes. Similarly, drivers don't pay more during peak times than non-peak times. They instead pay with their time, by waiting in traffic.

The third factor is that the market dictates private automobile sales. This is important because automobile companies and dealerships have an incentive to keep prices competitive while selling a high quality product. It also ensures that there are a multitude of different types of automobiles, and differing finance schemes and secondary markets tailored to a range of needs. The private sector is great at marketing things to people; government isn't.

While public transit can never be as flexible as private automobiles, some of the automobile's advantages can be reduced. Road tolls and congestion pricing ought to be implemented where practical. Ironically, offsetting these new fees by reducing the gas tax would actually also be beneficial for transit services. After all, the only reason many impractical roads are built is that they are financed out of general revenue. If roads were primarily financed by those who used them, more funding would go to highly traveled urban roads, and less would go toward subsidizing sprawl.

Here's the controversial aspect of the solution: Transit should operate on a for profit basis and its prices should closely reflect market forces — even if it means that transit fares increase.

Mass transit has one major advantage: where there is sufficient demand, transit is inherently cheaper than private automobile usage because the costs are spread over many people, making the per person cost lower. That's why most people fly with commercial airlines instead of chartering private jets, for example. But keeping the price too low reduces the ability of transit service to provide more routes. And this is important. While there is a segment of the population who are stuck with public transit no matter how inconvenient it is, most people won't ditch their cars unless they can get to their destinations relatively quickly. And it may not be economical for a transit system to get them to many of those places for $2.25.

A flat price structure subsidizes inefficient routes with efficient ones. But what if transit services charged the full cost for less efficient routes? While charging more for less popular routes may seem like it would reduce ridership, it wouldn't. If people knew that there were many additional routes going to out-of-the-way locations that they don't ordinarily frequent, they would still positively factor it into their calculation of whether or not they need a car. After all, paying $5 to get to an out of the way destination occasionally is still cheaper than getting a cab, and can often be cheaper than the cost of driving. Transit systems have higher ridership in major centres than in small centres, even when the fares are high. Transit is not only cheaper than driving in dense cities, it's also equally or more convenient.

But just allowing prices to fluctuate isn't enough. For a price system to function properly there needs to be an incentive to keep prices as low as possible. Public monopolies don't have this incentive. Furthermore, there needs to be competition to ensure high levels of service. The reason that air travel service is so high quality and cheap is because it is private, not public.

The thought of privately delivered public transit will no doubt turn some people off, especially public sector employees. And simply removing government from the transit business isn't necessarily the best solution. Instead, municipal transit services should be turned into transit commissions that coordinate and contract for transit from competing companies. Transit companies would bid on routes, and pay the city a fixed cost for the right to service each route based on a competitive auction.

For less cost efficient routes, a city could even offer a small subsidy per rider, should no transit company enter a bid. Whichever company would be willing to service that route at the lowest subsidy level would win. This would maintain downward pressure on costs. But it would be important that the transit commission use this as a last resort. Otherwise it could undermine the competitive market process by creating the incentive for companies not to bid on many marginal routes until a subsidy was offered.

Collecting variable rates for trains is simple, but it would be more difficult for buses. One method would be to have buses classified as local, express, or commuter, for instance. Each would charge a different rate. An automated payment system could be installed where riders swiped their cards on the way in and out, as they do on the Washington DC Metro, to calculate the rate.

Changing the operating and pricing structure wouldn't alter the way that people use transit services. Transit vehicles would still work on a coordinated schedule, and collect fees from riders as they always have. What would change is that the competing companies would have an incentive to keep operating costs lower, and to provide more routes. They also would have to meet performance guidelines monitored by the city, or face fines. What would change is the philosophy of transit companies. They would be out to make a profit.

This may seem like a radical departure, but consider that London, England, contracts out its bus service. If one of the world's busiest cities can co-ordinate a public-private partnership of this magnitude, there is no reason smaller cities couldn't do the same. The key is to create the right incentives and institutions. The current model of treating transit as a welfare service has failed. It is time to make transit the first choice for commuters, not the last.

Steve Lafleur is a Policy Analyst with the Frontier Centre for Public Policy.

Image from A metro bus in Madison, Wisconsin.

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    Disagree on the 3 factors

    1. This is a result of the way cities have chosen to be laid out. If designed better, buses would not have to take such roundabout routes to ensure access to a good many people, regardless of how hard it is to get there. Density also plays a role too. A loop should get you all round town, with spokes allowing you to get into the spaces within. As it is, I don't see gridiron streets, but a bunch of chaos based on developers' whims. If local/state government would have better land use policies for cities and surrounding areas, and federal government did a better job of allocating funds, transit systems would be just as convenient as automobiles are today.

    2. Gas taxes are debatable. With more people buying hybrids or even electrics, they're not going to be a dependable income source for government. People give in less gas taxes, but continue to use roads just the same. Toll roads are also becoming more popular, though I don't have an issue with them since it's based on usage.

    3. I somewhat agree. It's hard for public transit though, because of politics. The best people don't always get hired at public transit agencies; it's often a person that's a friend of a politician or whatever. As a result, there's waste. I agree, that this should be as close to a for-profit service. It's said that Chilean bus drivers get paid more for performance too, as to how many people they get on board or how fast it takes the average person from Point A to Point B.

    Somewhat agree, somewhat disagree

    I use public transit a lot when I'm in the city, since I don't have a car, and I politely ask my friends/family in the suburbs or on occasion.

    I don't think you can tackle welfare policy without hitting on transportation policy. Poor people can't earn a living if they can't afford to take the bus, have a car, or it takes way too long to walk/bike there. Jobs aren't always close by your home, and the poor can't depend on job security so they aren't likely to move any closer than they are either.

    Instead, I think there should be separate bus lines for the poor and middle class. I'm not trying to raise class warfare here, but the middle class obviously doesn't want to sit in the same bus with the poor for obvious reasons. Using a bus, I've found most people are just fine. They don't do anything annoying, just keep to themselves or aren't rude or anything. But sometimes there are men that look like they're from gangs, families that have little discpline with unruly children, and homeless that bring their trash and odors on board. You have to learn to ignore them.

    A bus system with extra perks and geared towards the middle class would help a lot. Stop in areas that most middle class people live in, at stops most middle class people will head to, and so on. Fares could be $5-$10 max for one trip. Mileage perks or based on # of trips would be nice too. Discounts for college students. Free WiFi, power outlets to charge stuff, and a better interior. Friendly bus drivers too please! So I agree, transit systems would be more popular if they catered to everyone in mind, instead of bringing it down to the lowest common denominator.