Welcome back! I hope you all had a “perfectly unhappy” summer break; here’s our adoring foster dog Kuri getting into the spirit. I’m pleased to say that — as of 9 January — Kuri was successfully adopted into a loving new family.
In this post, I first make some general observations about public transport fares, and, second, consider the current fare system in Auckland. In making these observations, I draw from my experiences in New Zealand and Australia, particularly South East Queensland (NB: Here is some information on recent changes that I was involved). I hope you enjoy!
Public transport fares: The nature of the problem
Imagine you are running a PT system that is characterised by three key attributes.
First, market research indicates that — for most people — quality matters more than fares. That is, most people prefer a comprehensive network of fast, frequent, reliable, and decent services to one that is cheap. The summary below provides some insight into such issues in a global context (Source: Accenture).
Second, the elasticity of demand for PT is approximately -0.40. This implies a doubling (100% increase) in fares will cause a 40% reduction in demand, ceteris paribus. While overall demand is inelastic, there are some specific market segments (people and/or journeys) for which demand is elastic. Litman (2017) discusses elasticities in more detail.
Third, political processes set the PT budget to be the sum of (1) annual subsidies and (2) fare revenue. Annual subsidies are typically fixed, while fare revenue is determined by settings we can choose.
In this context, the simple question we want to answer is what is the best way to charge people for using public transport to maximise patronage while remaining within budget?
Even from these three stylised pieces of information, we can gain some useful insight. For example, because overall demand is inelastic but extra fare revenue can be spent on more infrastructure/services, we can conclude:
higher fares == more revenue == more infrastructure / services == ambiguous impact on patronage.
That is. while higher fares have a direct negative effect on patronage, they also increase the revenue available for PT investment, which may increase patronage. If the additional investment attracts a lot of passengers, then higher fares may well lead to more patronage (and more revenue), and vice versa if revenue is used ineffectively.
The same analysis doesn’t hold, however, for elastic market segments, where instead we find:
higher fares == less revenue == less infrastructure / services == less patronage.
In this case, higher fares have an unequivocal negative effect: Higher fares lead to less patronage, both directly due to prices and indirectly due to less revenue for investment in PT infrastructure/services. Hence, we should avoid absolutely avoid increasing fares for elastic market segments.
Differences in elasticities provide a strong economic rationale for setting fares lower for some market segments, and higher for others. It is usually, however, not the only thing people consider when setting fares. Here are some common socio-economic reasons for setting lower fares for a particular market segment:
- Economic efficiency, such as:
- High elasticity, as discussed above.
- Low marginal costs, such as when spare capacity exists.
- Positive externalities, such as reducing car travel in congested conditions.
- Social equity, by targeting discounts to people with less ability to pay (vertical equity).
I think these are relatively uncontroversial. What’s more controversial and less well understood, is that (in the usual situation where demand is inelastic and budgets are constrained) discounts tend to rob “Peter” to pay “Patrick”. That is, discounting fares for one market segment requires that other fares are higher (holding constant the investment in PT services/infrastructure).
So before we discount fares for certain market segments, we need to ask ourselves why these people/journeys are more deserving than others? I’d suggest the socio-economic reasons presented above are a useful place to start. Now let’s turn our gaze to Auckland, ah Auckland …
PT fares in Auckland: Evaluating the Present System
From what I can tell, Auckland’s PT system currently offers discounts for the following people/journeys:
- Journeys using HOP, which are discounted compared to paper tickets;
- Cross-town journeys, which are discounted due to the radial structure of fare zones;
- Concession card holders, such as children, seniors, and school/tertiary students; and
- Regular users via monthly passes.
I’d argue the first two discounts (HOP card users and cross-town journeys) can be motivated by low marginal costs. That is, it’s more cost-effective if people use HOP to pay for their journeys and/or travel cross-town.
Concession discounts, in contrast, are easily motivated on social equity grounds, even if you might quibble over (1) the level of the discount and (2) eligibility criteria/processes. Such issues are relevant during peak times when capacity constraints are binding and marginal costs are high. This highlights how the various reasons we might offer fare discounts can sometimes sit in tension with each other. In general, I consider concession discounts to be relatively uncontroversial.
And finally, we have monthly passes. I don’t know of any particularly convincing motivation for offering monthly passes on social equity grounds. In terms of economic efficiency, the case is also not clear-cut. Specifically,
- High elasticity: I don’t know of any evidence that finds monthly passes are associated with high elasticities.
- Low marginal costs, while monthly passes reduce transaction costs for users and AT, these are relatively small. On the other hand, monthly pass holders seem likely to travel at peak times, when marginal costs are high.
- Positive externalities, again, I don’t know of any evidence to suggest that people who use monthly passes have more positive external effects than other PT users.
One of the reasons I don’t really understand the monthly pass is that it just seems so poorly-targetted when compared to other potential bulk-buy passes, such as dailies, weeklies, and annual passes. My intuition is that we’d be better off replacing the monthly pass with a combination of:
- Daily value cap of, say, $15 per day, which is automatically applied to qualifying HOP cards;
- Weekly discount of, which applies a 50% discount after you have made 8 journeys per week; and
- Annual pass, which must be pre-purchased and has a price set at approximately 40 times the weekly pass.
The value of these discounts, compared to the monthly pass, is that they are more targetted to off-peak periods when elasticities are high and marginal costs are low. The daily value cap targets evenings, whereas the weekly discount targets weekends and the annual cap targets summer holiday periods. In contrast, the monthly pass is not targetted to off-peak periods at all. I’ll explore these issues in more detail in my next post, once I’ve had some more time to think.
Summary and Next Steps
In the first part of this post, I presented some general ideas on PT fares. The purpose was to introduce objectives and terms that may help build some common understanding on issues relating to PT fares. The takeaway message of this section is that — in the presence of inelastic demand and a budget constraint — the act of lowering fares for some people/journeys tends to necessitate higher fares for others. Once you appreciate this point, then I think you start to apply a higher evidential bar to discounts, because fare discounts for person A mean higher fares for person B.
In the second part of this post, I consider Auckland’s existing fare system and — in particular — the discounts it offers. I think most existing discounts are readily motivated on strategic grounds, aside from monthly passes. I feel that there is insufficient evidence to support monthly passes and, moreover, they seem to be poorly-targeted compared to other types of bulk-discounts, such as dailies, weeklies, and annual caps/passes. In contrast to monthly passes, these other passes target discounts to off-peak periods that tend to be characterised by higher elasticities and lower marginal costs.
To finish, I want to emphasise that fares are not a panacea for PT in Auckland. Some people seem to think that demand for PT would soar if only we could get the fares exactly right, and subsequently over-emphasise the role of fares. I personally counsel an alternative perspective: For most people, fares are just one factor of many that affect their use of PT. Rather than striving for the perfect fare system, I’d instead advise that we aim for one that (1) aligns with strategic objectives; (2) is simple and easily communicated and marketed; and (3) avoids perverse/unintended consequences. Once you’ve achieved these outcomes, perhaps the best thing you can do is regularly review fares to identify issues and opportunities for improvement. This is especially true now that we have such rich ticketing data available via HOP.
One of the reasons I’m somewhat ambivalent about fares is because I find that fares don’t ultimately vary as much as people think they do. That is, the total costs per kilometre often tend to work out quite similar across different cities, even if the structure of the fare zones and products varies greatly. For example, here’s a figure from 2011 (source), which evaluates PT fares per passenger-kilometre (in AUD) for fourteen cities in Australia, Canada, and New Zealand.
This suggests that Auckland is something of an outlier on the high-side, which you may initially think is concerning. The thing to remember, however, is that since this figure was made AT has implemented integrated ticketing and a new fare structure, such that the cost per passenger-kilometre in Auckland now is likely to be much lower than what it was before. Aside from Auckland’s fares having historically been on the high-side, what I find most striking about the figure is actually how similar the cost per passenger-kilometre is across different cities, ranging from a low of $0.13 to a high of $0.20 per kilometre. Its not a large range and/or spread given the differences in size and structure of the cities themselves.
Is there likely to be further room for improvement? Absolutely, hence why I’m writing this post. And in my next post, I will put some skin in the game by presenting some of my own ideas on how Auckland’s PT fares could be improved. Before I do, however, I’m keen to hear your own ideas on how PT fares in Auckland could be improved.