CES - Discussion paper series, DPS14.18 pages:1-41
This paper studies the political economy of public transport pricing and quality decisions in urban areas. We consider a hypothetical two-region federation. In each region there is a demand for public transport and for car use, and the group mainly using public transport may be a majority or minority in the region; moreover, part of the users of both the public transport system and the road network may come from outside the region. In this setting, we compare regional and federal decision making on public transport fares and supply characteristics. Under regional decision-making we find that, first, the political process may result in very low public transport fares, even if car owners are a large majority of the population. The fare preferred by car owners is increasing in the toll on car use. Cost recovery always improves with the share of outside users. Second, imposing a zero deficit constraint on regional public transport operators implements the second-best welfare optimum, independent of whether car owners or non-car owners have the political majority. Third, compared to centralized decision making, decentralized decision making leads to higher fares and better cost recovery. Our findings are consistent with the lack of opposition to very large public transport subsidies in Europe, and they provide a potential explanation for the tendency towards decentralization of public transport policy-making observed in many countries over the last decades.