A few months back, Auckland Transport put out its new fare policy for consultation. The draft policy, which they call Simplified Fares, has two main elements:

  • Standardised fare zones that ensure that journeys within or between zones cost the same regardless of whether you’re travelling by bus or rail [ferries are excluded]
  • No transfer penalties between services, which is a key element in enabling a frequent connective network.

Those are indeed simple principles, but developing and implementing a fare policy is seldom simple. So the whole thing got me thinking: Why do public transport fares work the way they do? And could we do things differently?

As I’m curious, I figured that I should take a quick look at the economics of fare policies. Part one of the series looks at the biggest-picture question: Why do we subsidise public transport?

First, some background. In most developed-world cities, public transport systems are subsidised by taxpayers. Users pay some of the operating costs – ranging from as low as 10% to as high as 80% – but seldom all. In New Zealand, the national farebox recovery policy requires all regional transport agencies to cover 50% of their public transport costs from fares. However, data from the Ministry of Transport suggests that some agencies are closer than others to this target:

MoT farebox recovery rates 2013-14

Is 50% the right number for all regions? I don’t know – and the answer depends in part on what other goals we’re trying to accomplish with public transport pricing. But it’s clear that some level of subsidy must be provided in order for the entire transport system to work efficiently.

To see why, we need to take a look at what economists call “second-best pricing”. According to Wikipedia, it can be desirable to impose a subsidy to “offset” for an uncorrected market failure elsewhere:

In an economy with some uncorrectable market failure in one sector, actions to correct market failures in another related sector with the intent of increasing economic efficiency may actually decrease overall economic efficiency. In theory, at least, it may be better to let two market imperfections cancel each other out rather than making an effort to fix either one.

In transport, we have a situation where people have multiple options for getting around. They can drive, take the bus (or train), cycle, etc. In this situation, a price change in one market – say, a fare increase for public transport – can encourage people to switch to another mode instead of paying more.

As I argued in a recent post on congestion pricing, road space is usually not priced “efficiently”. All road users pay fuel taxes or road user charges based on the total number of kilometres driven or litres of petrol used. But they don’t pay more to drive on busy roads, where they impose delays on other drivers. As this diagram from a 2012 UK study on the external costs of driving shows, the last 10-20% of car trips impose significant costs on society.


Public transport can play a useful role in smoothing off the big spike at the right hand side of that chart, by providing a more space-efficient option for travelling on popular, congested routes. Another way of saying that is that in the absence of congestion pricing (and in the presence of other subsidies for driving, such as minimum parking requirements), higher public transport fares can result in a perverse outcome – additional congestion and delays for existing road drivers. This is shown in the following diagram:

PT fares and congestion diagram

Effectively, a failure to price roads efficiently means that we have to provide subsidies for public transport to prevent car commutes from being even more painful than they currently are. Public transport subsidies are, in that sense, subsidies for drivers. By making your neighbor’s bus fare cheaper, they in turn make your drive to work a bit easier.

Finally, it’s worth considering how we got into this situation. 80 or 100 years ago, public transport systems tended to cover their operating costs with fares. For example, Auckland’s tram system was profitable, if in need of maintenance and refurbishment, up until its removal in the mid-1950s. (Mees ref?) This changed, in large part, due to the introduction of subsidised motorways.

This article by Joseph Stomberg at Vox describes how the US interstate highway system was developed in the 1950s as an explicitly subsidised – i.e. not tolled – transport mode:

The first step was changing how roads were funded. In the 1930s, there were already privately owned toll roads in the East, and some public toll highways, like the Pennsylvania Turnpike, were under construction. But auto groups recognized that funding public roads through taxes on gasoline would allow highways to expand much more quickly.

They also decided to call these roads “free roads,” a term that was later replaced by “freeways.” Norton argues that this naming shift was essential in persuading the federal government — and the public — to shift away from tolls. “It started with calling the roads drivers pay for ‘toll roads,’ and calling the ones that taxpayers pay for ‘free roads,'” he says. “Of course, there’s no such thing as a free road.”

In other words, the “original sin” of transport subsidies was the construction of non-tolled highways paid for out of general tax revenues. This choice led in turn to a situation in which we must adopt “second best pricing” in public transport, and offer an offsetting subsidy. I’m not necessarily opposed to this… but it does mean that I am skeptical to complaints that buses and trains are subsidised.

What do you think we should do about public transport pricing?

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  1. You might like to look at “Fare’s fair”, a policy which Ken Livingston brought in when he was head of the GLC (years before he was Mayor of London). He reduced fares for public transport drastically (20p for a bus ride) and the use of PT soared. Then Maggie came along and killed it.

    1. There’s a decent history here: http://www.bilderberg.org/farefare.htm
      “People’s travelling habits take a long time to change. If bus fares go down we’re not going to give up the car overnight, if at all, but even during Fares Fair’s first year it was a roaring success. Millions of Londoners chose to leave their cars at home and, since London is the hub of the national public transport network, the idea looked set to spread across the nation. Details of the scheme were masterminded by Sir Peter Maesfield, Chair of London Transport Executive, who proudly watched passengers flocking to the tubes and the buses in their droves. His off-peak fare scheme meant that the overall passenger load was spread, poorer passengers travelling when buses and trains would have plenty of spare capacity.”

    2. You do need to balance the reduction in fares with the revenue generated by the additional patronage. If fare reduction was the complete answer we would pay passengers and no one would use cars!! The issue in Akl is that peak revenue nearly covers cost, including vehicle depreciation. Off peak even though the cost of providing the service has a marginal aspect to it doesn’t generate sufficient revenue to cover the additional cost and therefore farebox as a whole deceases.
      Answer? A mix of peak congestion demand suppressant either through pricing or just let the market decide that congestion is bad enough that driving isn’t an option. Support this with simple competitive PT example Northern Busway.

      1. “You do need to balance the reduction in fares with the revenue generated by the additional patronage. If fare reduction was the complete answer we would pay passengers and no one would use cars!!”

        That’s going to be the topic of the next post: price elasticities of demand for public transport!

  2. Couple of things Peter.
    -Farebox recovery is set at 50% nationally but as smaller regions are expected to not perform as well as the likes of Auckland and Wellington recovery in those two will likely need to be higher
    -Farebox recovery is to reach 50% over time (can’t remember by which year) so it’s s case of working towards it rather than it being instantly a applicable.
    -Given increases in Patronage and reduction in costs (electric trains) of expect Auckland to improve once we get the 2014/15 results. Probably not to 50% yet though.
    -with full roll out of EMUs, new network and PTOM, farebox recovery in Auckland is expected to pass 50% and I think will probably push towards 60%

    1. With the new zonal fares in Auckland, I though the farebox recovery would actually drop, at least initially.

      I also wouldn’t expect PTOM to result in much savings, at least in the short term. AT are passing on a lot of new extra costs onto the bus companies that they will have to recover through the new rates. This will improve over time as AT takes the majority of the benefit (80%) of any increase in patronage.

      1. “I also wouldn’t expect PTOM to result in much savings, at least in the short term. AT are passing on a lot of new extra costs onto the bus companies that they will have to recover through the new rates. This will improve over time as AT takes the majority of the benefit (80%) of any increase in patronage.”

        You are assuming that increased patronage relates to increased revenue.
        One of the downfalls of the zonal system and the frequent need for transfers means that patronage leaps up but revenue stays the same or may even decline. Meantime cost has increased as more local short haul vehicles have been added.
        Example – a journey where I live is currently 1 trip morning and afternoon to go to work. Could be two or even three journeys per slot depending on weather and how far needs to be walked from the local route. Fare revenue – the same. The number of journeys to work hasn’t changed
        Also PTOM has a core principle of improving commerciality. Not sure how that will occur.

    2. If farebox recovery reached 60% in Auckland, do you know if there is a way to compel the govt to consider increased funding to bring it back toward 50%.

      Or would that argument only have power in the public opinion / political realm?
      Which is less palatable because of the divisive way it tends to get argued in the public space (editorials, news, PR groups etc which seek to pit Aucklanders against the rest of the country, or visa versa).

      1. Well I guess more accurately it would push towards 60% without other interventions. AT can impact farebox recovery by lowering fares. That in itself will drive some more patronage and likely require more services

  3. Just thinking through some of the projects and initiatives and what impact they’ll have on farebox recovery.
    Electrification – patronage and therefore revenue up (perhaps another 10m trips), costs neutral (costs per service down by offset by running more services)
    New network – patronage up – costs neutral (more efficient use of existing resources)
    Integrated fares – increases patronage but reduces fares
    PTOM – likely to see costs reduce from more competitive tendering and elimination of bus companies running profitable routes commercially.

    1. Agree with the first 3 but

      PTOM – increased costs (amortised over life of contract) including new uniforms, new bus livery (inside and out), cameras in all buses, tv in all buses, higher Euro standards (newer fleets needed, worsened due to lower demand for older buses so lower resale).

      Rumor from the bus co’s is they are concerned AT will run out of money to fully implement PTOM as AT aren’t considering the cost of all the extra demands they are including in PTOM. Plus with the new integrated fares, there will be less of those ‘profitable commercial routes’ to take up the slack.

      1. Bus companies have been creaming for year by rorting the system. Especially over the last few years amortising costs over short term contract extensions. They just don’t want the gravy train to end

        1. More reason for AT to consider a delivery arm. Why do we pay for others to make a profit out of core business ?

        2. While that may or may not be correct, new contracts will be priced (negotiated or tendered) to give them a reasonable return and will have no reference to past profits.

          The new contracts will be more expensive to operate (increased costs and lower fare revenue) with minimal upside (80% of upside goes to AT) but potential downside (harsh penalty regime). A naive new entrant may not realize this but the incumbents know and will tender on that basis.

  4. All forms of public transport are subsidised. That’s what makes them public. Because they are deemed to have a public purpose, subsidy can vary but use does not necessarily correlate with subsidy. Some things have higher capital costs – highways, railroads. other have high operating costs – buses, railroads, ferries. Financing different modes varies a lot from place to place and mode to mode, say, pre-Maggie London v. Waikato. “Privatisation” can help reduce costs or improve management but there isn’t direct evidence of either except where privatisation is used to bust unions, and even then, what is the quality of the workforce you get?

    The political problem PT faces is the fare box. Because riders have to drop a coin in a slot, non-PT riders assume that PT should pay for itself. Without tolls, there are no checks on a driver’s assumption that use of a highway is a right not a privilege and everyone should cover the cost of rights. There is the other political problem for PT: drivers don’t think they should subsidise PT because they don’t use it, and PT has an obvious source of revenue which they would do well to maximise. It’s a double whammy that PT has suffered under for many years.

    1. StateHighways and other roads have huge operating costs too, contra to the popular view. Road policing alone is subsidised to about the same level as PT, almost a $1Billion in the up coming 3 year period.

      1. Plus roads have massive operating costs that are privatised. Gov may not concern themselves much with this but citizens should as these sunk private costs make us poorer.

      2. Exactly, and even then the Police are forced to focus by their masters on trivial things like speed on a motorway rather than actual safety measures like indicating, dangerous driving, giving cyclists space, not keeping left etc.

  5. I agree with your assessment. Ultimately what it means is that PT subsidies can have positive net benefits, in which they are justified. It is also possible that PT subsidies will have negative net benefits though, if the costs are too high for whatever reason. So there is nothing magical about PT subsidies.

    However, based on this philosophy, PT subsidies are a second best option. The first best option is road pricing. So why not implement road pricing? If the answer is “because politics”, then we are really just in a silly politically driven situation that isnt based on any underlying philosophy of improving aggregate welfare or whatever. In which case arguing for a second best option to improve aggregate welfare is fine, but it is just an argument in an environment governed by populist politics.

  6. (Warning: Auckland-centrist perspective follows)

    Congestion charges seem bloody difficult to implement in Auckland due to widespread congestion during rush hours. Given this, is there a strong argument for PT being significantly cheaper during peak travel times, and more expensive during off-peak times? That would seem to be a step towards greater efficiency.

    1. I’d argue that off peak should be cheaper, to encourage better spreading of the passenger load and to increase the ridership and flow on farebox recovery when there is spare capacity. Particularly on routes that have frequent service (currently 15 minutes).

      As the off peak services increase farebox recovery, the peak services will not have to cross subsidise off peak services, allowing for either more services within existing spend, fare decreases, delaying any fare increases or more likely a combination of options, depending on the policies AT/AC wish to encourage.

    2. “Congestion charges seem bloody difficult to implement in Auckland due to widespread congestion during rush hours.”

      Why? Congestion is a case of tragedy of the commons. Say we gave bread away for free, and funded its production through taxes. Tax funds are limited so there is always a wide spread shortage of bread. Bringing in pricing would solve the problem. The fact the problem is widespread does not make the solution more difficult to implement.

      However, as to your comment. Making it cheaper in peak hour is possibly a good option. It depends on the costs of that policy vs the benefits.

      1. The fact that politics trumps rationality in this and other areas of society needs to be accepted by those of us that wish to improve outcomes. Box clever.

        And in this case I believe that the best route to get to time of day road pricing is first implement it on the already available Transit fare structure. We have overcrowding, congestion, at peak on Transit vehicles, but plenty of capacity on many off peak services, so let’s radically drop the price of off peak travel. This is likely to stimulate demand to the point that it will probably be at least fiscally neutral, and relieve pressure at peaks.

        And provide a useful local proof of concept for the more volatile road issue. Transit to lead the way.

        1. true, because forcing more people onto PT at peak time due to congestion charge will just make the experience worse for those on PT.

          We need to build up the off peak demand so that there isn’t so much cross subsidization.

        2. I can absolutely see the rationale behind dropping off-peak transit fares Patrick, but that seems to rest pretty heavily on the assumption that users can shift the times of day that they use PT. I’m not convinced that this is true for a large proportion of users.

          For many commuters the decision is not ‘when and how shall I get to work’ but rather ‘how can I minimise the costs of getting to work by 8:30am.’ Thus, given that the largest benefits of PT use are derived from reduced congestion, the key policy decision is how to maximise PT use and minimise private vehicles at peak times only.

      2. I was simply meaning that in practical terms it seems very hard to enforce congestion charges without just shifting the problem elsewhere on the road network. E.g. to put a “toll perimeter” around Auckland CBD you would need around 20 tolling stations (by a rough visual estimate).

        1. Ah yeah, I agree if you used a cordon approach. I think a full region wide GPS based approach is the way to go.

        2. How would a GPS system work. Would out of towners be exempt from the cost of installing GPS and would that result in everyone claiming to be from out of town?

          Why not just utilise the existing system that operates on the Northern Toll Road. I assume the back end was future proofed to handle multiple tolls? Teh CBD is bound (throttled?) by motorways which means only ~15 entry points – the motorways would need large gantries but some of the smaller streets could manage with pole mounted??

        3. The CBD isnt the only place that is congested though. There is congestion all over the place.

          I dont know how you would deal with out of towners. You might set it up nationwide and eliminate fuel tax altogether. Or you could have cameras that “caught” vehicles without units and sent them a bill. I’d prefer the former.

        4. Major privacy issues if you demand tracked GPS units in every car. Very hard to get that over the line even ignoring the high costs to install (would need to be hard wired so people could easily unplug whenever they made a trip to the city)

        5. One option would be to make it voluntary, at least initially. You can opt in and be exempt from fuel tax or stay out and pay fuel tax.

          Those who would benefit would opt out. This would have the effect of leading to an increased fuel tax on those who did not opt out which would shift the costs to those who cause them. As more people opt out, the price continues to rise and eventually you will have the vast majority on the system, at which time you make it compulsory.

        6. That would require a shift to road users charges for petrol as it would be an admin nightmare for petrol stations to administer.

          As it happens, companies like ERoad are now providing GPS systems for Road Users which are being adopted by large trucking, vehicle and bus fleets.

        7. Yes you are right, a road user charge would be far more practical. Yeah I have seen ERoad, so the technology exists.

  7. The big cross subsidy is that peak hour passengers pay market rates in order to prop up the inter peak and off peak system. So the commuters get to stand up and put up with a crowded system and yet they are the people who are freeing up road capacity at the critical time. I agree with Steve H above it would be better to discount peak fares.

  8. Is Public Transport a way to reduce Auckland’s Congestion which is said to cost $1.25b/year?
    Is there any other alternative, eg build more roads by reducing the amount of tenanted space? (More road more instant storm water)
    Could we put a price on parking on the AC (roads/Parking buildings) and reduce the traffic?
    How to achieve the changes to a congestion free network?
    Congestion pricing would be a good start.
    Other thoughts that would seem to have merit are increase the PT subsidy now (using a large portion of the $1.25m congestion cost) and increase the PT frequency with local feeders being available within 500m of all the urban homes. The fares being such that the increased uptake would then reduce that subsidy so that the congestion reduced and the cost reduced.
    ?Using the ZVV model would be great start.

    1. Congestion doesn’t cost $1.25b a year. That is the figure comparing our currently congested roads to having free flowing conditions at all times. The same report notes that getting free flowing conditions at all times is impossible as it would basically require a collapsed economy to force most people away from travelling at all.

      They stated the true cost of congestion in Auckland is about $250m a year, comparing the current conditions to the maximal flow of the network (maximum throughput happens at a lower speed that ‘free flowing’).

  9. This article focusses only on the role of PT as an alternative option to driving, and hence subsidies being required solely because of the way we price (or don’t price) driving.

    But another role of PT is as a service we provide for those who can’t drive, eg disabled people, elderly people, school students. We pay for these people’s transport for the same reason we pay benefits to people who can’t work, or pay for healthcare for people who can’t stay healthy.

    There are reasons to subsidise PT irrespective of how we price driving. I think in smaller centres with less/no congestion this takes on a much more front-seat role than it perhaps does in Auckland.

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