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:

RPTP Integrated Fares Zones Map

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?

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  1. What’s wrong with the existing stages that we currently have? They seem to work well, and seem pretty fair.

    The only change I would like to see is moving to the model Brisbane has where travelling on multiple trips in the same journey is treated as a single fair. E.g. taking a bus from Glen Eden to New Lynn and then a train into Britomart should cost the same as if I took the train or bus for the whole journey. Currently this is charged as two separate trips with a 50c discount on the second trip.

    As for off peak fares, I don’t really see the point (but then I do most of my travel in peak times). People will use PT at the time they need it, and having cheaper fares between 9am-3:30pm and after 7pm won’t change the travel patterns of the vast majority users, which would be the aim of having discounted off peak fares (which is 30% in Brisbane)

    1. There’s a lot wrong with current stages. It’s unfair for any crosstown services. Outer link would never work without their capped fare. Another example is a trip from Northcote Shops to North Shore Hospital. Catch bus 555, you pay 2 stages. Catch 975, you pay 1 stage. Furthermore, except at the fare boundaries, the current transfer system penalises you for transferring most of the time – Transfer at Akoranga – you get charged up to $0.20 more for your trip, transfer at Smales, you get charged at least $1.50 more… hows that for good system?

      The proposed simplified zones system is solving these two examples, but around the boundaries it will be a mess, unless some kind of a short-distance fare is introduced.

      1. It is not just a mess at the boundaries- the whole thing is a mess. If you have an appointment at Greenlane Hospital and travel from Herald Island (27km) it will be two stages. If you travel from Greenhithe (29km) it will be four stages. The fare stages are just a gerrymander.

  2. For example: what happens to paper tickets, which are important for visitors and casual users?

    It becomes more complicated for the bus driver to work out a price requiring up training / pay rise for drivers and a big investment in on the bus tech.

    1. Actually the Netherlands (at least Amsterdam do this simply).

      Distance based fares for users of the OV chipcard.

      Casual users can choose between a 1 hour ticket or a 24 hour pass.

      Simple 🙂

    2. Shouldn’t be much training.

      Driver: Where you going?
      Customer: Location
      Driver: *presses location on screen in front of him*
      Driver: price (as shown on screen)
      Passenger: *Gives driver money*
      Driver: Gives passenger ticket.

      Difference to today…Nothing. If they follow overseas examples, they won’t sell tickets on the buses and tourists can buy ATHop tourist card.

    3. Simple is king, whatever you do, take any thinking by the user out of the equation, the easier to use the system the more people will use it. A method that apple uses I guess you could say, and it works for almost everything.

      1. But Josh, that requires AT to manage the system from the passenger’s point of view and that’s not their usual approach. It’s managed for the convenience of contractors and passengers take what they get.

      2. Absolutely – there are easy technical ways to achieve this.. We have to get with the times. Hourly tickets, phone apps, signs on bus stops,… What about good old fashioned driver knowledge?

        One option is paying when people get off. A noticeboard on the bus stop that says how far each stop is, and tells you what the price is, or you can check the app, or ask a driver.
        A passenger is issued with an electronic tag when they get on the bus, and they place it into the card reader they get off. The reader calculates the fare. The driver collects fare, or it can be decucted from eftops/credit card (tap n go, etc). If you have a cellphone with RFID and a money app like Wallet, then you can use that instead of a tag (maybe next year).

        If that’s too difficult then base it on stops which are much more closely related to distance than massive stage boundaries. eg, I’m going to Britomart.. that’s 8 stops, that’s 10 x 40c per stop = $4.00. Its no more difficult than what we have right now which is saying “I’m going to Britomart” and the driver saying “That’s 3 stages, that’ll be $4.00”

        1. Thats what ATHOP does. Don’t need the driver to do anything, everyone just needs to get a card like you do in other major cities around the world. But the fares need to be simple to, they really need to roll out daily/weekly caps so people don’t have to think about using transport as a cost, and just use it.

  3. I am not sure if it is reasonable to compare Sao Paulo with the mini city that is Auckland, but there they have a single fare, no matter where you go, how you go, as long as you complete your journey withing two or three hours. Obviously being a place where people need public transport, as opposed to Auckland where cars are ridiculously accessible. A flat rate would reduce administration costs and with that improve efficiency. Three dollars per journey? Or perhaps free with your library card, like the museums. After all there is something rather cultured about catching the bus!

  4. I am very much in favour of time variable pricing. But not by raising peak fares but rather by significantly discounting off peak. The cost to farebox recovery may be small, zero, or it may in fact be positive. Some people can shift their travel times, and it may be enough to stimulate mode shift by others. The marginal cost of more people riding off peak will be zero until a great many turn up, and the savings from time and mode shifters will be considerable. But we won’t know till we try.

    Free may even be the right off peak fare? I don’t know. Pretty sure our current models don’t know either. They seem to get very little right in this age of discontinuity. Why not try 50%? Half price off peak and perhaps 75% on shoulders, keep moving it as the peaks spread.

    1. “I am very much in favour of time variable pricing. But not by raising peak fares but rather by significantly discounting off peak.”

      If you collect less fares from one group of passengers, you’re going to have to collect more from others. So increased peak fares are necessarily the flip side of reduced off-peak fares.

      The only exception is if reduced fares lead to a sufficiently large demand response to offset the reduction in revenues from existing users. But, as I’ll discuss in the next post in the series, we can’t assume that this will happen!

      1. If revenue is increased for no additional cost, you’re effectively increasing the farebox recovery rate, in this case why wouldn’t you have fare differentiation.

        Only if the cost is increased, i.e. the additional demand requires additional capacity (Northern Express) then the required additional services should be within the existing fiscal envelope, or they will effect other users, would fare differentiation be a bad idea.

        I doubt it’s easy to predict volumes, particularly as ridership grows, which is used for setting the payment volumes/scheduling. Is this should become easier/better over time.

      2. Public transport isn’t quite like other goods. With a normal goods if demand is higher then effiency requires a higher price. But PT is more of a merit good where there is a positive externality associated with its use. The external benefit is higher at peak times and drops during off peak times when traffic congestion is lower. If you account for the externality then you should probably discount PT in the peak!

  5. I favour distance based fares, using bands to reduce the complexity of pricing, which should encourage those shorter trips, especially where a HOP card is used. I think we need to get to the point where you don’t think about the getting on PT for a journey, just what the best way to get there is.

    Is there any technical reason we couldn’t use zones for paper tickets and distance fro electronic, apart from the issues around explaining the difference in costs to casual users?

    1. Nik, Singapore has that. They’ve been struggling with this method since implementation in 2010. They had to issue a number of recalls to give people refunds because some distances were calculated wrongly etc… It’s also a mess as different operators have different prices for the per km. While it works, it’s incredibly complicated. Zone-based plus a short-distance fare will give us more flexibility.

  6. I think the two stops on every route adjacent to a zone boundary (except obvious discontinuities such as the Harbour Bridge) should count as being in both zones.

    1. Why not three? or to be politically correct, let’s do four?… Nah… short-distance fare is much better way to solve this problem!

  7. There is one minor issue I’ve come across with distance based fares. Do you base it on a direct distance or based on how far the vehicle travels. As an example, if the former then from the CBD Sunnyvale is actually further away than Henderson is however it is of course one stop closer. Also if vehicle distance do you punish western line users for the detour via Newmarket

    1. The question I’d ask is what problem are we trying to solve?

      If it’s encouraging shorter journeys, then distance traveled, with off peak and HOP discounts.

      If it’s congestion reduction, then straight line, with daily/weekly caps to reward those who choose to use PT for the majority of their trips.

    2. I think distance based fares should be ‘crow flies’ distance so users are not punished for ludicrous decisions made by agencies who design zig-zagging bus routes for coverage rather than speed or frequency.

  8. Just have two fare zones and large overlaps.

    I’m kinda over Auckland and others trying to maximise revenue (and depress use) by complicating their products.

    1. Its not about maximising revenue. If we wanted to maximise revenue then we wouldnt run pt services at all ;).

      More seriously, setting pt fares is harder than it looks. I find there are two policy tensions which tend to pull pt fare structures in different directions.

      First option: subsidise long distance pt journeys. This is effective at reducing congestion, but leads to more long trips, which are costly to service. It also encourages sprawl, i.e. poor land use outcomes.

      Second option: subsidise short distance trips. This tends to generate lots of demand, but also competes with walking/cycling, leadong to negative health externalities.

      Cities that try and subsidise both short and long distance tend to screw middle distance journeys. This is bad because theres lots of them and they tend to be where pt reaches a critical mass.

      In a nutshell: while everyone has their fav fare system, none are perfect. And what may look to be a strange fare may often be a conscious policy decision.

    2. I think you’re wrong to suggest that even current fare levels are suppressing that much demand. Average fare levels in Auckland – especially after the cuts in recent years – are similar to Canadian and Australian cities which achieve higher boardings per capita. We know from studies both locally and internationally that the key thing that customers want are more frequent, more reliable and faster journeys.

  9. Why is the CBD stage so tiny? If there’s a reason for that, then why can’t it be a cheap stage, like 50 cents? That would clear up a lot of unfairness.

    But the zone based system is simplistic to the point of stupidity. The current boundaries massively penalise trips near the stage boundaries (which seem to be placed near highly populated areas) & through the CBD…K road is a common transfer point and becomes prohibitively expensive to cross town.

    For paper tickets, time-based or distance-based fares could be implemented with simplified zone or stop-based fares. But really, we shouldn’t need paper tickets. The Real price to produce a HOP card is about 50c – $1. Instead of a paper ticket, passengers without a HOP card could be charged 50c or $1 extra, and be issued with a HOP Card. Its not rocket surgery. Hop Card topup stations need to be more common and be able to calculate fares as well (if they can’t already?).

    1. City Centre zone is small and not cheap because it is the highest demand area, especially at the peaks and expensive to add services to. Basically it is where the most utility from PT is derived, both for the whole city and for the individual. And because there is personal utility it is fair that the individual contributes. And for everyone these are services that cross-subsidse the ones at the edges, making for a better network.

      But as Stu says above, it is imperfect, but hopefully less imperfect than some other way…?

      1. Its also where pt services tend to be highly loaded and/or expensive to supply. So its a way of managing demand/costs. The pay-off is that other journeys can be cheaper.

    2. The small city zone is there so the single stage zone stays affordable. If you didn’t have it the zone would be bigger and the fare would have to be more expensive.

  10. Pay for a “ticket” and you have two hours to conduct any transfers required to complete your journey. Longer journeys already carry the cost of additional time… no need to add a monetary cost too. Works for San Francisco.

  11. Peter, I hope you’re going to cover group discounts. I think this is one area where there is great potential to attract marginal off-peak users who would otherwise drive, such as parents with children. It could be as simple as 9 am to 3:30 pm accompanied children up to 14 are free provided there is at least 1 paying adult per 2 children. Because of the fare structure there are probably few from this market sector, but the capacity has been paid for by peak users, so any additional paying users assist fare-box recovery. It also helps train up the next generation to use PT.

    The proposed fare boundary map shows a discrepancy at Puhinui. To travel from the Manukau South zone to Manukau by train, changing at Puhinui, means paying for an extra fare zone. Yet this route should be encouraged because at close to end-of-line stations there is plenty of space on the trains and it imposes no additional marginal costs on the rail network. Has anyone on this board alerted AT to this discrepancy ?

    1. Good idea!

      I was planning on taking a look at price elasticity of demand for PT in the next post, and probably consider opportunities for “price discrimination” – i.e. targeting people who are unusually responsive to prices for fare discounts. Discounts for children on off-peak services could potentially be one effective way of doing so.

      1. Victoria’s regional carrier offers family discounts:

        “Family Traveller
        Up to two children (4-16 years old) travel FREE per fare-paying adult at off-peak times. Children under 4 travel free at all times.

        Concession fares apply for any additional children”

        There are other discounts on this site worthwhile looking at for your post. The fare system was developed for paper tickets with conductors, and is probably over complicated for a city system. An electronic fare system is now available on Vline (Myki), but doesn’t offer these discounts. Paper tickets instead need to be purchased at a staffed station. The discounts are not available within the Melbourne fare zones 1 and 2, but anyone with a valid Vline paper ticket can travel at no extra cost on any metro train, tram or bus.

        Family travel is something to discourage at peak time, because families are carried more efficiently in high-occupancy vehicles. Another issue is the noisy kids can be off-putting to other travellers, so there needs to be plenty of space on the train for affected travellers to get away from them.

  12. What about fares based on time? I experienced this in Italy and it worked fine. Validate tickets on the bus/train, traveling at peak becomes more expensive, no issues with boundaries. Everyone can understand and track it…simple I think.

  13. With a metro / train system any smartcard that requires tag on / off provides a pretty easy system for distance based fares.

    Distance based fares can be ‘soft’ in that they can be a mix of actual distance and station stops.
    This can also be a useful way for AT in the future to passively raise fares

    Example: Station X,
    5 stops to the east, 10 to the west. first 2 stations each way $2, next 3 stations $3 etc.
    $3 max travelling to the east (stops 3-5), $5 max travelling to the west (stops 9-10).

    still 16 stops on the line, now $2 first station, next 3 stations $3 etc.
    $4 max travelling to the east (stop 5), still $5 max travelling to the west (stops 8-10)

    Next revenue raise you make it first 3 stations each way $3, next 3 stations $4, then first 2 stations each way $3, next 3 stations $4 etc.

    This distance / stop fare can be applied to all lines with a possible cap, say 15-20 stops or $8 and rising.

    Bus pricing more complex, but should be discounted when used in conjunction.

  14. The link is a metro schematic, look at the blue line and see the gold / orange circle, that is your current station and what it costs to get to every other station in the metro system.

    The first 4 to 6 stations… 20 (ntd = $1!) then 25, 30, 40 etc as you travel out from your current station… sorry couldn’t (be bothered) find a better photo, hope it helps.

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