Thinking about optimal public transport subsidies is a tricky business, since there are so many factors to be taken into account. Trains and buses are less polluting and cause less congestion, but they’re also slower and less direct.
But according to a paper just published in the American Economic Review, when you put all the factors together, it looks like public transport merits a high subsidy – over 50% in the case of DC, LA and London. Their results would likely apply to Sydney too, though the right subsidy would be smaller for a spread-out city like Canberra.
Should Urban Transit Subsidies Be Reduced? (gated published version, working paper version)
By Ian W. H. Parry and Kenneth A. Small
This paper derives empirically tractable formulas for the welfare effects of fare adjustments in passenger peak and off-peak rail and bus transit, and for optimal pricing of those services. The formulas account for congestion, pollution, accident externalities, scale economies, and agency adjustment of transit service offerings. We apply them using parameter values for Washington (DC), Los Angeles, and London. The results support the efficiency of the large current fare subsidies; even starting with fares at 50 percent of operating costs, incremental fare reductions are welfare improving in almost all cases. These findings are robust to alternative assumptions and parameters.
Sensibly enough, the authors don’t account for distributional issues in their analysis, since economists generally take the view that that the tax-transfer system is a better and fairer way to help the poor than subsidised services.