Farebox recovery: A thought experiment

As noted in earlier posts, public transport in the US is heavily subsidized. Regardless of whether this is a good thing, is 100% transit farebox recovery even possible, or will a death spiral result in no users? This post engages in a thought experiment to test what kinds of fares (and subsidies for users (not the system)) would be needed to achieve 100% farebox recovery.

A thought experiment:

If 3 million people in the Twin Cities metro each purchased a Metropass at $76/month, that would be $228 million/month or $2.736 billion per year (about 9 times the current annual budget). (Brian Lamb would be very happy). This is highly unlikely on a voluntary basis, the evidence for which is that we have not yet seen it.

Brian Lamb, smiling

Brian Lamb, smiling

According to MnDOT (2013 p. 121), total budgets are $301 million per year on Metropolitan Council systems for bus and LRT (excluding other services), so really ($301M)/($76*12) = 330,000 pass-holders would be required to cover existing costs. This is just an order of magnitude estimate, and certainly high since while a large (but unknown) fraction of existing riders are essentially daily riders, others are more infrequent riders and would still pay fares rather than get a pass. The problem is that there are not 330,000 daily or near daily users of the system, instead there are 267,700 daily trips for Metro Transit, and a few more for the opt-outs. Presumably about half that many persons ride daily, assuming mostly round trips, and one-trip per day. This is further complicated by transfers, but this is a blog post not a journal article.

Working this problem in reverse to cover $301 million dollars in expenditures from 267,700 rides (assuming round trips and no transfers) requires $2,250 per person per year, or $187 per person who rides per month. But if fares increased to the equivalent of ~$3.10 per trip (at 60 trips per month), there would be fewer users.

How many fewer users?

Scenario 1

If users were now paying $2.25 per trip in fares (two-way peak) and it increased to $3.10, that is a 39% increase in effective user prices (though this is complicated by switching from an out-of-pocket fare payment to a monthly pass). At an average fare elasticity of -0.4 (as per this report), we would expect a decrease in ridership from 133,750 travelers per day to 114,000.

Total revenue from 133,750*(1-0.15) persons at $187/month would be ~$255 million per year.

Nevertheless, if Metro Transit could reduce costs by $46 million = ($301M – $255M) without reducing service, yay! That is however unlikely, and we see aspects of the transit death spiral in place: Fewer riders -> Less revenue -> Reduced Service -> Fewer Riders. This might be self-limiting, as the weakest services affect the fewest number of riders.

Alternatively, we could just keep raising prices until we reached equilibrium. This reduces revenue and thus requires a rate increase, which further reduces riders. This is also self-limiting, and in this scenario the system ridership drops to just over 100,000 persons per day (200,000 trips per day) at an annual Metropass rate of $2988.

Scenario 2

Maybe riders are not paying on average $4.50 per day. A current farebox recovery ratio of 0.31 suggests riders are not in fact paying an average of $2.25 per trip. Instead, I estimate it is about $1.91 per day or $0.95 per trip equivalent. Certainly some riders pay “full freight”. Other have passes (and use more than the average number of trips that a pass is equivalent to), ride in the off-peak, or otherwise have discounts. Thus increasing to $3.10 for everyone would be more than a 40% increase for some. In this case, we would need to increase fares from $1.91 per day to $6.17 day, a 223% increase. If riders actually were expected to pay this, ridership would drop about 90%. Then to continue full service (though why would we?), we would need to increase daily rates to $56.22. This would reduce ridership to about 0. This is the full transit death spiral in action.

(There is a middle ground, retrenching service to that which is profitable, which would lose riders and service, but hopefully lose more costs than revenues).

Clearly we cannot uniformly more than triple real transit fares as paid by patrons and expect the current set of riders to pay that.

A plausible policy would argue for “equity subsidies” to cover the difference for groups that society wants to provide aid to rather than discounting fares for everyone alike.

Give them money

The greatest consequence of an effective fare increase to cover 100% of operating costs would be on the poor. One strategy (which appeals to my libertarian and rationalist sensibilities) for dealing with this problem is the negative income tax (endorsed by both Milton Friedman and the US Green Party), i.e. give the poor money to spend as they choose. There are some public policies which do this (Earned Income Tax Credit), but nothing so blatant as systematic cash handouts. One of the concerns is with incentives. If we just gave people money for being poor, wouldn’t we get more poor people? The other concern often raised is one of financial responsibility. Some people are poor temporarily due to bad luck or circumstance. Others have trouble with financial management and just giving money would not help.

The next best is to give transportation vouchers to the poor to spend on transportation as they choose. The risk is that the poor with the transportation voucher might find buying a car or gasoline is a better decision than riding transit, especially if their jobs and homes don’t align with the network. While this is presumably better for the individual traveler (why would they allocate their resources that way if it weren’t), it doesn’t help the transit agency or other travelers, as it weakens transit service by removing the positive externality they would otherwise generate, and adds to congestion on roads in the short run.

The third best (and the best for the transit agency itself) is to give poor people pre-paid or discounted transit passes to spend on public transit.

The worst solution is to subsidize transit for all riders. This needlessly reduces the resources available to operate the transit system, and keeps transit agencies in the subservient position of having to beg for money on a regular basis rather than being fully funded by their users.

Presently, the “budget” for subsidies for the poor comes from the transit agency. I would argue that the budget for negative income tax, transportation vouchers, or transit vouchers should come from general revenue, as the primary objective is to help individual people, not transit systems.

Comparison of fares around the world

However, that said, I don’t think ~$8/day is an “unreasonable” or “immoral” fare for an unlimited use transit pass (or even $4 per trip for 2 round trips per day), though it is on the high side of rates for world cities (and certainly above average for US cities). If poor riders were subsidized some large fraction of the difference between current fares and the new fares, it could produce a farebox recovery rate of about 100% (depending on actual fare elasticities), compared to the 31% Metro Transit has now.

  • Toronto charges $3 each way for a single fare purchase, and $128.50 (1 Canadian dollar = 0.99 USD) for a monthly Metropass. Farebox recovery rate for TTC is 63%.
  • Vancouver charges $2.75 for adults one way, one zone, and $4.00 for two zones. Passes are $91 for one zone and $124 for two zones. The farebox recovery rate for Vancouver is 52%.
  • London charges a rail fare of £4.50 for adults one way (though only £2.10 for users of Oyster cards), for just zone 1 (the center of the region). The Annual travel card for zones 1-6 (excluding the exurbs) is £2,224. The current pound to dollar exchange rate is 1 USD = 0.64 British pound sterling, so the travel card equivalent is $3,458. Buses are cheaper. Farebox recovery rate for London is 50%.

A list of prices in various cities is at priceoftravel.com. Another list is at MSN.

A perhaps more important point is that Canada has a higher farebox recovery rate than the US, better transit, and higher transit mode shares. What are they doing more right than the United States?

Summary

The competitive environment for transit limits how high rates can go. In cities with a greater dependence on transit (and greater inconvenience for driving), transit agencies have more latitude to raise fares. The political environment also matters, and it may be simpler politically to subsidize rides for everyone, not just those who need it.

Lowering costs can also increase farebox recovery ratios, by lowering the denominator (expenses) instead of raising the numerator (revenue). As noted before, transportation costs too much, so there are probably a number of possibilities for reducing expenses.

There are a lot of policy alternatives for fares between $4.50 and $8.00 day, there is no magic number. Until transit is again privatized without subsidy there is no requirement for 100% fare recovery. It would almost certainly be a bad idea to do this kind of change overnight, large systems need transitions. Still, raising base fares should be on the table to give transit agencies more operational independence and to reframe their status from [whatever it is now] to what it once was and will eventually be again, a public utility providing a service in exchange for consideration.

Great cities have great transit and their users pay more for it.

(Yes drivers should pay full cost too, I have written about this sufficiently, get off my lawn).

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8 Responses to Farebox recovery: A thought experiment

  1. Zvi Leve June 3, 2013 at 7:40 am #

    Since Montréal’s transit agency ( STM) moved to ‘smart cards’ a few years back, they have been introducing a variety of different fare options, presumably with the goal of expanding their market reach. My particular favorite is the 10 (or 20) trip individual ticket option. Instead of paying the full $3 fare (or whatever it is), the discounted fare is closer to $2.25 and the pre-paid fares can be used whenever I want (even after a fare-increase!).

    Other options include a whole range of different fare-pass options: daily, three-day, nightly, weekly, monthly, and even annual passes (the annual pass is paid for on a monthly rate, but is discounted over the year and includes numerous other perqs). Going electronic and diversifying the fare options should in theory help the agency better forecast and manage their fare-box revenues.

  2. Derek June 3, 2013 at 9:40 am #

    Aspiring to a 100% farebox recovery rate is a thinly-veiled means of imposing an incredibly regressive tax on transit users. The proposal to privatize public transportation is a particularly lucid instance revealing how markets are socially constructed, not at all a natural phenomenon.

    To provision access to public transportation as if it were a market good is to undermine principles of fraternity and democratic freedom. Depriving low-income individuals of mobility through the farebox undermines the common cooperative project of self-government.

    Privatization has been applied to an expanding range of goods, services, and (previously held in) common resources, at least since the violent enclosure movement in early modern England. Although the use of force and state police power necessarily accompanied early acts of commodification/displacement, the situation persists by continuously re-constructing fragmented individuals–excluded from common access to resources and normalized to market and competitive interaction. Such normalization is evident in Chicago Mayor Rahm Emmanuel‘s recent political gaffe, when he declared that those unhappy with public transportation fare hikes could simply “make that choice” to drive instead. This is a line of thinking consistent with the regulation of a good by exit rather than voice. And the fare hike represents an exclusive approach to provisioning the good.

    Many transit users obviously do not have the choice to drive instead. For them, exiting the market means not visiting a friend or fully participating in city life, suggesting a limitation on their freedom of association.

    Cities such as Tallinn have discovered that reconceptualizing public transportation as a public good, available freely to all, has widespread spillover benefits. Among these is the subtle erosion of the shackles of profit-seeking imperatives.

  3. Mike Hicks June 3, 2013 at 10:23 am #

    I lean in the direction of Derek’s comment — If we made public transit free to use across the metro area, it would only increase the government’s annual contribution from $200 million to $300 million — one-tenth of a new Vikings stadium per year.

    Riders could see travel times decrease significantly due to fewer people fumbling for change, and the ability to switch to all-door boarding. The cost to count fares would be eliminated, though there would probably be demand for greater policing on board buses.

    I think the University of Minnesota’s free campus buses show that this can work very well. With the way transportation funding and planning remains heavily tilted toward the car, it doesn’t make sense to increase the burden on transit users.

    Some places have tried using fare payment systems (probably paid monthly or annually) which adjust the cost based on the income of the rider, and that seems to work pretty well. Again, however, there would have to be an equivalent system implemented for car owners for it to be a balanced approach.

  4. Kasia McMahon
    Kasia June 3, 2013 at 12:56 pm #

    I have enjoyed this thought experiment. I wish it included a comparison of the per user costs of a driver to that of a transit user though. It is commonly said that road construction is highly subsidized (I don’t know if that is true though). However, I do know that gasoline is a heavily subsidized commodity (can you count the Iraq war in these costs?). Perhaps if we removed the subsidies on gasoline, there would be a sufficient increase in public transit usage to cover operating expenses.

    There may also be a lot of long term environmental benefits to subsidizing transit usage that can not be calculated in the upfront costs.

  5. Faith June 3, 2013 at 1:48 pm #

    What if the cost of subsidizing parking (ABC ramps, convention center ramps, etc.) over the last 30 years had either (a) not occurred or (b) subsidized transit? How much money would that total? If that parking had not been built, would it be easier to raise the price of transit?

    When a roundtrip transit fare is $4.50 and early bird parking in downtown Minneapolis starts at $4.75, unfortunately it’s pretty hard to raise the price on the former without people switching to the latter.

  6. Bill Lindeke
    Bill Lindeke June 3, 2013 at 5:48 pm #

    Like Derek and Mike, my preferred thought experiment is “what if transit was free?”

    That said, this thought experiment is interesting too. I guess I want to get on your lawn, though, because the key to 100% farebox transit is what you mention in passing, a system with “greater inconvenience for driving.” As long as driving downtown and parking cost less (and are faster) than the transit option, nobody will do it. Right now in Minneapolis, you can pretty easily park for less than the cost of two transit fares. (In Saint Paul, less than the cost of one.)

    For 100% farebox to work, we’d need to make parking more expensive (though ending parking subsidies/policies) and/or prioritize transit through dedicated rights-of-way. This is the difficult part of the puzzle.

    • Alex Cecchini
      Alex Cecchini June 4, 2013 at 9:00 am #

      It’s too bad that people don’t think of or calculate fixed and non-direct variable costs of driving to their commutes – the cost of the lease/loan payment, insurance, tire changes, maintenance, car washes, etc, and then add gas on top of that. Obviously most people here are aware of the cost of operating a car per year, but most people only look at the marginal operating cost (parking, maybe gas) when deciding transportation options (while ignoring many hidden subsidization down the chain of gas/roads/etc).

      I think that a major problem of transportation is that we’ve tried so hard as a society to make driving cars the fastest and cheapest option through subsidies. Economically speaking, if transit were the cheaper option, one should expect to take longer. If driving was for speed and convenience, you would expect to pay more for the privilege to make that choice. However, we’ve subsidized making driving faster/more convenient (more lanes, etc) and subsidized the cost (parking, gas price depression, etc) – totally backwards. And we haven’t even really succeeded in either since we haven’t built our way out of congestion and car ownership is still very unaffordable to many families (and will only increase in the future).

  7. BB June 4, 2013 at 8:56 pm #

    If transit was free would that mean more money spent on the local ecomomy?

    If I can just hope on a bus and spend that 5 dollars I normally pay (utah). Wouldn’t I just spend that on the economy anyway.

    When you can move people you can also move cash.

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