Sunday, March 05, 2006

Free public transport in Melbourne?

Frank Fisher is reported in the Sunday Age (here) as advocating free public transport in Melbourne. This means public transport will be 'unpriced' not 'free' since we still as a community have to pay for it. With this qualification, is the 'free' transport proposal sensible? I think not.

The core idea is that private car use creates congestion, pollution, greenhouse gas and accident externalities so people use their cars excessively from the view of the social advantage. Implicit too (I guess, this is not sketched out) is that it is expensive to price away these externalities so a 'second-best' option is to divert private car users to public transport by subsidising it. Since cross-price elasticities of demand for public transport by private car users are low these subsidies must be hefty and, given substantiual scale economies in public transport marginal costs are low. Hence it might be just be best to zero price public transport.

There are many issues here:

(i) Public transport is over-priced at present since, even with subsidies, its pricing reflects average not much lower marginal costs. Gans et al argue this point well.
(ii) Congestion in the CBD and along major motorways can be cost-efficiently priced by a combination of a cordon pricing scheme and curbside pricing of major arterials. See my paper with Andrew Hawkins here.
(iii) Making public transport 'free' would subtantially increase its use (The Age suggests a 30% increase) but much of this would come from additional travel not from people abandoning car use. Moreover there are also additional large costs of purchasing additional rolling stock to meet increased demands. The reason as stated, cross-price elasticities are low. Making public transport free would encourage socially-excessive total travel.
(iv) Meeting all public transport costs from the public purse would leave diminished incentives for private operators to improve service that match demands. The difficult issues are in Melbourne's periphery where demands for travel are low and journeys are often cross-town. The best way to address such demands is to provide private incentives for innovatory transport solutions. Such incentives will be reduced if public transport was 'free'.
(v) Pollution, greenhouse and accident externalities can be internalised through petrol excises and policing of roads. These policies are already in place.
(vi) Melbourne's traffic problems are location-specific. Thus the inner city is well serviced, the periphery less so. Providing 'free' transport to all would redistribute incomes away from low public transport using periphery regions towards intensive (and affluent) inner city users. In short it would redistribute transport resources from those poorly-serviced toward those well-serviced. This type of income transfer would be generally regressive.
(v) Generally the Fisher approach is based on the false premise that private travel by car is evil. It is not. It is socially-harmful only if private motorists do not impose all the costs they impose. Road and other types of pricing policies can internalise these costs.

Melbournians would be worse-off with 'free' public transport. We need a better public transport system which has greater flexibility and which offers improved service frequencies to reflect demands. Private sector incentives that reward operators who provide needed transport services will do this. We need to price key roads and public transport at social marginal cost but going further and providing transport for 'free' is ill-advised.

Update: After writing the above I see Joshua Gans broadly endorses the proposal but assumes comprehensive electronic road pricing in conjunction with unpriced public transport.


P.A. Coplay said...

I would like to put one argument in favour of pricing above social marginal cost. If we see discovering new bus routes in the outer suburbs (like from Doncaster/Templestowe to LTU) as a form of innovation or at least a risky investment - shouldn't we at least provide some incentive for entry/innovation? Otherwise we will remain with an overserviced inner city and a long term underserviced middle/outer suburbs. Price established routes and roads as suggested, but incentives for new products (as in other markets) are needed and missing products may well be a substantial product (also see my post at Coreecon)

hc said...

Risk in itself is not a reason for subsidies but you might want to provide subsidies because you cannot adequately congestion price or because you can't internalise pollution etc. I am not in favour of subsidies that will encourager a more dispersed city - these already exist in the form of underpriced infrastructure.

In the suburbs I am really thinking about open slather competition with mini-buses, buses, jitneys that camn be developed to service low density communities. Competition would then force prices towards marginal cost. Mass transit is not feasible in many of these areas.

Not my real name said...

Prof Clarke, I have always wondered - when people say that free transport reduces the incentive for private operators to operate properly, isn't that part of the subsidy?

I tend to think that a government would pay an operator a certain figure to meet performance standards. In other words, the subsidy is not only the price of the ticket, but is also at least some of the incentive that would be present if the operator were running the system privately.

I understand that there is no point paying the entire difference to the private operator, because then society is still paying the same amount as if the network were privately priced, but why can't the incentive be built in to the subsidy?

Apologies for my obvious ignorance, but ironing that out would be interesting for me!!

hc said...

I think in the periphery of large cities real innovation is called for. One needs smart transport operators who will pursue profits by tapping into valuable niche markets. This might not be large firms - it could be minibuses operating to the local shops or schools!

Subsidise perhaps but basically let the market rip! If there are reakl needs let decentralised greedy firms locate them and help realise the social advantage.

Kel said...

Hi, my name is Kel, I am 11 and in grade 6. I am in my school debate team and this is the subject I am doing this term.

I have lived in Melborne most of my life and I see enough people on public transport everyday. I think that changing the price would cause confusion.

My Dad now lives in East Brunswick and I live with my Mum in Barwon Heads. Half the time I'm drivimg in Melborne with my Dad I have to stop so people can get on the tram.

So as I said, don't get rid of the price or lower it, whats the point, it would just cause confusion.

Kel said...

Me again, I have come down to another reason. Public transport would almost cost the same as a car.
Do you have to pay to get a tram or taxi roadworthy?



Do you have to pay for a tram or taxi's pertrol?

My answer is no. Its probably all comes down to the same price anyway.

By Kel.M

hc said...

nmon, I think the subsidies relate to mass transport (some bus and all rail). This reduces incentives for minibus and smaller scale transport options.

Kel, Its nice to talk to you. I have a son in year 3. Its a good debating topic. Prices signal the scarcity of things so setting zero prices suggests transport isn't limited in availability when it is. Its better to make prices of public transport reflect the costs of providing the service but actual price should be set a bit below this because road use by private cars is not fully priced. This means too many people use roads. Giving a subsidy provides reasons for motorists to shift toward public transport - which reduces pollution and congestion in our cities.

I hope this helps. Let me know if you have other questions.

Kel said...

Harry, starting free transport would be a problem itself. The Age in March 2006 suggests that an estimated price of $340 million dollars would be spent a year to keep it up and running.

A City in Belgium, Hasselt, tried this but it reduced the amount of cycling and walking more than users of cars.

So therefore I come to an conclusion of leaving Public Transport how it is. Worry about the bigger issues like factories and other pollution reasons. Public transport is just a little fraction of the problem.

By Kel

Georgia said...

hi harry
i am working with Kel on this one.
i was wondering if you had any reasons against having free public transport.
Well i do!!
first of all i would just like to say that if we had free public transport in melbourne it would increase the risk of young people doing bad things
Example... if it were free then young people would get on it for fun because they would not have to pay so then they would be on it all the time and the people who actually neede to use it would not be able to because they would be overcrowded.Then the people that needed to use it would eventually end up using there cars.

i need help said...

Can you help me get some answers against having public transport

i am in a debate team and we are debating on thursday and i dont have any answers.

Kel said...

I need help, you have the short end of the stick mate. You got the worst topic. Sorry, its true.

Kel said...

Could you please learn to spell, I hate it when people can't spell properly, "u" and "r" aren't words mate.

Eliza said...

hi harry i'm also part of the debating team against making public transport free and i believe that its not the cost thats putting people off using it.

just making it free without including services wont change peoples habits enough to make the cost worthwhile so make in improvments to the service and maybe youll see a difference in who is using public transport.

i need help said...

that georgia girl cant spell