The announcement of Auckland Transport’s new fare policy made me curious about the economics of fare policies, so I’m taking a quick look at them. In part 1 of this series, I argued that 100% cost-recovery isn’t a realistic goal for public transport. While charging public transport users for the full costs of their journey may seem appealing, it will result in the perverse outcome of increased congestion on the roads. In the absence of congestion pricing, subsidising public transport can be a useful “second best policy” to improve the efficiency of roads.
In other words, if you like driving, you should also like public transport subsidies, as they make your life a little bit easier.
However, this principle doesn’t tell us much about how we should price different types of public transport trips. For example, should people pay more to take longer journeys on public transport? Some public transport agencies, like the New York Subway or the Los Angeles PT system, don’t think so – they allow you to ride as far as you want for a flat fare. Others, like the San Francisco BART system and most transport agencies in New Zealand, charge higher prices for longer trips.
To give another example, should people pay more to travel at certain times of the day? Most transport agencies in New Zealand don’t think so – Auckland Transport charges users the same price during peak times and the middle of the day. But other agencies, such as the Wellington’s rail system and the Brisbane public transport agency, do raise their prices during peak times.
So we have some choices available to us. What principles should we use to choose relative fares for different routes, once we’ve decided on an overall level of public transport subsidy?
In my view, it’s appropriate to charge a fare that accounts for the marginal cost of using the network at different times and in different locations. For example, if it costs twice as much to get people between points A and B as it does to get them between points A and C, then the trip between A and B should cost twice as much as the trip between A and C.
If we didn’t do that – i.e. if we set fares at the same level for those two trips – we’d expect people to demand more trips between A and B, which are expensive to provide, and fewer cheap trips between A and C. This can in turn make the whole system less efficient.
Similarly, there may be a case to vary prices by time of day. It tends to be more costly to provide public transport capacity to meet peak demands. This is because it’s necessary to buy buses (or trains) and hire drivers that run for two hours in the morning and evening and sit idle the rest of the time. But it might not be possible to go too far in this direction – after all, putting up peak fares too high means pushing more people back onto congested roads.
So if we set aside time-of-use pricing for the moment, we’re left looking at varying charges for different types of trips. In most cases, this means charging more for longer journeys than for shorter journeys. How can we do this?
One option is to use zone-based fares. This is what Auckland Transport has traditionally done, and what it’s proposing in its Simplified Fares policy. The advantage of zones is their simplicity and transparency. You can pinpoint your origin and destination on a map, and know exactly how much you will pay:
However, zone-based fares can result in some odd outcomes near boundaries. For example, under the zones above, if I travelled from Henderson to New Lynn – a four station journey – I’d pay for a single stage. But if I travelled from Fruitvale Road to Avondale – only two stations – I’d have to pay for two stages. Does it really make sense to pay more for a shorter journey just because it crosses a line on a map?
Perhaps it doesn’t. So one alternative would be to move to a fully distance-based fare structure. In effect, you’d pay based on the number of kilometres travelled, regardless of where you were going or how many transfers you made in the process. This has advantages – it eliminates boundary effects, for one – but it’s administratively complex and potentially confusing for users. For example: what happens to paper tickets, which are important for visitors and casual users?
How do you think that we should set prices for different types of public transport trips?