American Economic Review: Vol. 99 No. 3 (June 2009)


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Should Urban Transit Subsidies Be Reduced?

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Parry, Ian W. H., and Kenneth A. Small. 2009. "Should Urban Transit Subsidies Be Reduced?" American Economic Review, 99(3): 700-724.

DOI: 10.1257/aer.99.3.700


This paper derives empirically tractable formulas for the welfare effects of fare adjustments in passenger peak and off-peak rail and bus transit, and for optimal pricing of those services. The formulas account for congestion, pollution, accident externalities, scale economies, and agency adjustment of transit service offerings. We apply them using parameter values for Washington (DC), Los Angeles, and London. The results support the efficiency of the large current fare subsidies; even starting with fares at 50 percent of operating costs, incremental fare reductions are welfare improving in almost all cases. These findings are robust to alternative assumptions and parameters. (JEL L92, R41, R42, R48)

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Parry, Ian W. H. (Resources for the Future, Washington, DC)
Small, Kenneth A. (U CA, Irvine)

JEL Classifications

L92: Railroads and Other Surface Transportation
R41: Transportation: Demand, Supply, and Congestion; Safety and Accidents; Transportation Noise
R42: Transportation Systems: Government and Private Investment Analysis; Transportation Planning
R48: Transportation Systems: Government Pricing; Regulatory Policies

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