Common Tragedies

Thoughts on Environmental Economics

Unintended consequences

Posted by Daniel Hall on October 26, 2007

The DC Metro system is considering raising fares in order to close a budget shortfall. I don’t think this is going to turn out as well as they hope. First, today’s WaPo:

Minimum rush-hour subway fares could rise as much as 30 cents, bus fares could go up a dime and parking fees could increase by $1.15 under a plan agreed to by Metro board members yesterday that now must go before the public. …

Under the pricing plan, base rush-hour subway fares could rise 30 cents to $1.65, and peak-period costs could go up as much as 80 cents, depending on trip distances. Maximum rush-hour fares would increase 80 cents, from $3.90 to $4.70. There would be no increase during off-peak periods. …

The $1.15 increase in parking fees would be added to the charges at Metro parking facilities, which can be as high as $3.75 to $4 at some suburban lots. …

The fare increases are needed to help close a projected $109 million budget shortfall. The plan agreed to yesterday falls $20 million short, Metro officials said.

So what’s the problem here? Traveling by mass transit is not the only option commuters have. If the cost of commuting by rail goes up, while the costs of other transit modes stay the same, commuters will substitute towards their other primary option: driving! And more driving has its own very real costs — more accidents, more pollution, and most costly of all, more congestion.

Raising rates on Metro might close the budget gap for mass transit but still reduce societal welfare because of the externalities from shifting commuters towards driving. A recent discussion paper by Ian Parry and Kenneth Small suggests that this is likely to be the case.

First off, as way of background, let me acknowledge that DC already has a very economically progressive system for rail charges: prices vary with the length of the trip, and there are differential prices for peak and off-peak periods. These are good features that improve the efficiency of the system by making long-haul riders pay their share and by encouraging those who don’t have to commute at rush hour to shift towards off-peak travel. Second, the subsidy for rail transit in DC — 40% — is below the national average, as shown in Table 2 of the paper.

The key finding of the paper is summed up here:

The results support the efficiency case for the large fare subsidies currently applied across mode, period, and city. In almost all cases, fare subsidies of 50 percent or more of operating costs are welfare improving at the margin, and this finding is robust to alternative assumptions and parameters.

But the truly striking result comes if you look at the authors’ results for the rail transit in the Washington area during peak times in Table 3: they calculate that the optimal subsidy is over 90%! The two main reasons are the average-marginal cost gap for a public transit system — more riders mean increased service frequency and fuller trains — and… <drumroll>… the reduced congestion externalities from the shift to mass transit!

The paper suggests that decreasing the subsidy for peak rail transit will be welfare-reducing at the margin, in large part because drivers are going to pay the cost of increased congestion. And Metro’s proposed increases will do exactly this, as they are targeted at peak rail transit (both the increase in peak fares and the parking charges will primarily hit commuters).

Metro’s fare increases may help close the system’s budget shortfall, but that doesn’t mean it’s a wise policy for the area’s citizens. Far better to start charging drivers for the externalities they impose — congestion, pollution, and the like — and use some of those funds to start subsidizing mass transit.

One Response to “Unintended consequences”

  1. […] in urban and environmental issues, you should really read his Common Tragedies blog. Today, he looks at the proposed Metro fare increase: So what’s the problem here? Traveling by mass transit is not […]

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