Public transport
Given that public transport generates
external benefits,
there is a strong case for subsidising non-private means of transport,
such as bus, coach, tram and rail. The effect of a subsidy on public
transport is to reduce the costs of supply to the provider.
Subsidies to public transport
Evaluation
Even with a large subsidy, travellers may
prefer the convenience of private transport – implying that
PED
for public transport is
inelastic. Research suggests that PED is, indeed, highly inelastic in
the UK, with
short run elasticities for bus travel, around (-) 0.4, tube travel (-)
0.3, and suburban rail (-) 0.6.
Cross
elasticities are estimated to be even lower, with the cross
elasticity of demand between bus fares and car travel just (-) 0.1, at
best. (Source:
TRL Ltd, Demand for Public Transport
– A Practical Guide, edited by J Balcolme, 2004)
In addition, the income effect of lower public transport
prices may be very weak. Indeed, increases in real income may encourage
greater use of private transport use, and discourage use of public
transport, suggesting that public transport is an inferior good.
Subsidization of public transport may result
in a
moral hazard, with state subsidies being regarded as an insurance
against inefficient practices. Such inefficiency raises the cost of supply, and
diverts scarce resources from more efficient uses. For example, bus
companies may over-employ, and operate too many buses, which are run at
‘half-empty’ for long periods.
There is, of course, no guarantee that all of
the state subsidy will be passed on to the passenger in terms of lower
fares.