Are transit subsidies justified?

When it comes to the issue of transit, a lot of car drivers and sprawl-promoters love to point out that transit is subsidized, and quite heavily. Indeed, in North America, user fares tend to pay for only 25-30% of transit costs, whereas car drivers, even if they are somewhat subsidized, pay the entire cost of their vehicle, and their gas and a part of the infrastructure they use through different taxes. There are externalities, but of the direct cost of their transport, car users have a good case saying they pay a larger share of it than transit users.

When some call for things like congestion charges, tolls, higher gas taxes or less free parking, they react by saying that before any additional money is asked of them, transit users should have to pay the full cost of their transport. Now, I've already come out in favor of self-funded transit, but only after cars are forced to pay their own way. What can we tell them?

Subsidy 101

First, I think that prices in an economy running on money is an information vehicle: how many resources does it take the replace the good or service you are consuming. A price that is too low incites people to over-use a resource, which is unsustainable in the long run unless there is a wealth transfer, in essence a subsidy from the rest of the economy to the consumption of that given good or service. Generally, subsidies come from governments, but sometimes they may come from private sources, for instance senior discounts in many private businesses may be considered a subsidy, as certain customers are offered products at a lower cost, which probably has to be funded from the margin of sales to other consumers.

So why offer a subsidy? What can justify them?

• Social/political objectives

For instance, subsidizing health care satisfies a socio-political objective. Most societies see access to health care as a basic human right as it allows people to protect their most basic human right: the right to live. Therefore, we accept  a draw on the rest of our economic objectives in order to fund health care, so that people have access to it when they need it. Yes, this means that people will consume more of it than they would have otherwise and we as a society would spend more on it, but it's something we tend to see as a worthwhile sacrifice for a more humane society.

• An approach to externalities

Externalities are a cost to society or to a third party created by an economic transaction between individuals. For instance, if you buy cigarettes, the economic transaction was between a smoker and a tobacco seller (who himself bought it from a distributor, etc...). But if you smoke those cigarettes around people, the smell and tainted air they will be subjected to is an externality. If you have a car with no filtration system and use leaded gas, pumping a lot of pollution into the air and contributing to smog and asthma, then that is an externality.

The basic approach to externalities is to internalize it, meaning to have the buyer pay more for the product than its direct costs to account for the externality. However, there is another alternative: subsidizing alternatives to lower their relative cost.

For instance, let's take this economic choice between two options, the first one has low direct costs but high externalities, the second one has high direct costs but no externality.

The first option is more attractive to people because of the lower direct costs, yet the costs attached to it are higher overall. The result would likely be that most people would choose option 1, saving themselves money but costing more to society overall.

One approach to this problem is to simply add a tax to option 1 to equal the externality cost:

This incorporates the cost of externalities into the direct cost to the consumer and makes option 2 cheaper for them, many people will thus opt for it instead of 1. Overall, society has won out, because the costs of option 2 overall are lower than that of option 1.

Another alternative is to provide a subsidy to option 2 instead, equal to how many externalities people save by opting for option 2 over option 1.

In terms of consumer choice, the effect is the same, option 2 becomes cheaper than option 1, because of subsidies. However, the result of this is still that the direct cost of the product is cheaper than the real cost, prompting people to consume more than they would otherwise, draining other economic activities to subsidize this one activity.

Of course, there is an issue here: who collects the taxes or pays the subsidies? A seemingly easy solution would be to tax option 1 to pay for the subsidy of option 2, which seems like an obvious solution, but with a caveat that as the funding for the subsidy depends on the tax, the more people choose option 2, the less funds the tax on option 1 gets, making the subsidy lesser and lesser, phasing it out over time, which might make people angry and is politically contentious.

Cars, transit and externalities

So where does that leave us with transit subsidies and car taxes? Well, the reality is that cars have plenty of externalities. There is pollution, accidents, congestion, free parking, etc... Only some of which are internalized as costs. Yes, I did say free parking, which is put into real estate costs and into operating expenses, plus surface parking increases distances people have to travel, especially pedestrians and transit users. If congestion is an uncontroversial externality as it increases travel time for other drivers, why shouldn't the effect of surface parking lots on travel time for pedestrians, transit users and other car drivers be considered an externality?

Transit on the other hand has much less externalities. Per person, the congestion effect of transit is negligible compared to cars. Transit is much safer too, with estimates of accidents being 10 to 15 times less likely per person-mile than cars. In terms of pollution, it depends if transit is fueled by electricity or diesel. Diesel buses often don't consume much less oil than cars do per passenger, because they have to frequently stop, much more than cars, and they have dead miles. Diesel buses are also responsible for fumes in places they travel in. Electric transit on the other hand is much cleaner, at least where they're traveling.

Anyway, the point is, cars have plenty more of externalities than transit. This provides the justification for transit subsidies if we prove unwilling to increase taxes and fees on cars. Every person that takes transit instead of taking a car saves money to the rest of society: it reduces congestion and reduces the need for parking.

Quantifying it a bit

Some could say: "sure, transit may deserve some subsidies because of externalities, but 70-75% of subsidies?"

Well, let's see if we can quantify things a bit.

• Parking

Even parking in suburbs has been estimated to cost more than 850$ annually (source). That means that someone with a free parking spot at his workplace receives the equivalent of nearly 3,50$ in subsidy per day (or causes an external cost of 3,50$). That's the equivalent of a 1,75$ subsidy per trip. In comparison, in Montréal, the transit subsidy per trip is of 1,50$. It's the same in Calgary, each transit trip receives a 1,50$ subsidy. In New York, it's 1,00$. In Toronto, it's 0,78$. In most decently sized American cities like Boston, Chicago and Philadelphia, it's around 2,00$. 

Still, the commute isn't the only type of trip. Let's take another approach to estimate the parking subsidy per trip for cars. According to certain estimates, there are about 800 million parking spots in the United States, and maybe about 250 million cars, for a ratio of about 3 parking spots per car. One of these is residential, paid for by the car owner, so that's 2 parking spots that are generally provided for free. At 850$ per spot, that's the equivalent of 1 700$ per year per car. Assuming that each car travels on average 3,8 times a day (source, and that's a high number, going by the AMT trip survey, there are about 2,2 to 2,4 car driver trips happening each day for every car), then that gives about 1 400 trips each year. On average, each trip by car therefore receives a 1,20$ free parking subsidy.

Transit subsidy per trip for various cities (in green) versus parking subsidy per trip

• Congestion

Congestion has many externalities, but I'll limit myself to congestion delays. Estimates from America says that American drivers lose, on average, 38 hours per year in congestion. Assuming a relatively low value of 20$ per hour lost, that's a cost of 760$ a year that drivers inflict upon one another. To bring that down on the number of trips per person once again, supposing each driver takes 3,8 trips per day, that's the equivalent of 0,55$ per trip.

If we add that to the parking subsidy, we go above the transit subsidy for most cities:

Transit subsidy per trip for various cities (in green) versus parking subsidy plus congestion cost per trip

I know that some might say that it's unfair to add congestion costs because though it's a cost imposed onto others, as others also impose it on you, drivers end up paying as much for it in lost time as they make others lose. Still, there is little denying that transit users do not contribute to congestion, or at a fraction of it. Therefore, transit use represents a saving in congestion delay to everyone else... just like external costs ought to be internalized, external benefits also ought to.

But the reality is even worse for cars. I used the AVERAGE congestion cost here. But the reality is that each transit user actually reduces congestion by the MARGINAL value. Congestion is not a linear relation to traffic, a road at 50% capacity has no more congestion than a road at 10% capacity. It's when you approach 100% capacity and go over it that congestion explodes. Think about it, if there is bumper-to-bumper traffic for one hour on a chokepoint (a bridge for instance) and the capacity is one vehicle per 2 seconds, it means that each additional car coming to get through that bridge delays every other car that follows it by 2 seconds. So, if the traffic jam is there for one more hour, that means that 1 800 vehicles are going to be delayed by 2 seconds each, for a total of 1 hour, or 20$ using the estimate money value of time.

You read that right, every single additional car increases time lost in the traffic jam by 1 hour in total, the equivalent of 20$. In that contest, a single bus carrying 20 people would save the equivalent of 400$ as opposed to every one of these people driving alone. A bus carrying 40 people would save 800$ in time to all drivers. That's a benefit of 20$ per ride in transit at that point in time.

Conclusion

So, just by accounting for the parking subsidy and the cost of congestion, the current transit subsidy is fully justified in major cities, which are where most transit ridership is. Of course, this varies by individual, people who have to pay for parking or who drive during off-peak periods do not incur so many externalities. Studies have shown that just paying for parking is a strong incentive to use transit.

Also, this is a case where instead of internalizing external costs, we end up subsidizing transit. Overall, we are subsidizing transport, thus inciting people to consume more of it and to travel much longer distances than they otherwise would. This is a subsidy to sprawl, as lower transport costs mean people will see proximity in housing as far from as important as they would otherwise. It also means that we are draining the rest of our economy to pay these subsidies for transport to allow people to move around more than they would. Some may think that it is justified by a socio-political objective of making transport less expensive to people, but I would not agree to that, thinking instead that it incites people to waste money by making decisions that imply longer travel distances to achieve the same goals.

So personally my preference is to not offer subsidies, but instead encourage parking fees and to put in place congestion fees, plus tolls for expensive road infrastructure. This would force people to pay their own way and incite them to make wiser decisions, not only for themselves, but for all of society.

Finally, some sprawl promoters are keen to take this data and measure it by person-mile instead of per trip. This is a rhetorical sleight-of-hand, as since cars are much faster than transit usually, people who drive drive much farther distances, thus diluting the cost of the subsidies to cars by the number of miles traveled. This is the folly of saying that it is better to take a 10-kilometer detour rather than a 5-kilometer straight route, because fuel consumption is 7 liters/100 km (34 MPG) on the detour rather than 9 liters/100 km on the straight route, so it's 25% more efficient! Even if in the end, you burn 55% more fuel on the detour.

The cost per trip is a better metric, because transport isn't a good in itself, it is a mean to an end. If I go to work, I want to get to work, NOT travel 10 kilometers. I may HAVE to travel 10 km, but that is not my goal, if I go 10 km in the other direction, I have not achieved any benefit from my trip. So transport is like electricity: it's something we have to do to get what we want, but we want to use it as little as possible. Just like a new computer using less energy to achieve the same task is incontestably a good thing, policies that result in people having to travel smaller distances to achieve the same tasks is an incontestable good.