Review of Optimal Transit Subsidies: Comparison between Models

Abstract

Establishing appropriate subsidies for transit systems is essential to determine levels of investment and operations budgets for such systems. Transit subsidies vary significantly among cities around the world, generally being lowest in Asia and highest in Australia and North America. The potential economic rationale for subsidizing urban transit results from increasing returns to scale, positive externalities, and second-best pricing. In spite of low cross-elasticities of demand among modes, the second-best pricing argument is perhaps the strongest, given the absence of congestion pricing in most cities. Three models for calculating optimal subsidies are compared in terms of their mathematical form, assumptions, and input and output variables. Applying any of the models requires demand modeling and careful definition of costs. One model is identified as being the most practical, another is useful for research, and the third is perhaps better for explaining principles.