Marginal Cost Pricing and Subsidy of Transit in Small Urban Areas

A SURTC study conducted by Jeremy Mattson and David Ripplinger found that small urban transit agencies experience increasing returns to scale and density. This implies that increasing service levels will result in lower average costs. The report, titled "Marginal Cost Pricing and Subsidy of Transit in Small Urban Areas," has been published and is now available online.

This study analyzes economies of scale and density as a rationale for subsidizing transit agencies in small urban areas. A long-run cost model is estimated using data for 168 transit agencies that directly operate fixed-route bus service in small urban areas. Using vehicle revenue miles as transit output, results show that small urban transit agencies experience economies of scale and density. A full cost model was estimated that included the addition of external costs, such as environmental effects, and benefits. A benefit of increasing service levels is a reduction in rider waiting times. The study attempted to quantify this benefit. Results from the model were used to estimate the marginal social cost of providing service. Setting the fare equal to marginal social cost would maximize social welfare.

The results provide justification for subsidizing transit. The needed subsidy is calculated as the difference between the revenue generated by the optimal fare and that needed to maintain efficient levels of production. The rationale for subsidies is an important issue as many agencies have experienced recent reductions in operational funding.

Included in the report is a survey of transit agencies in small urban areas regarding recent changes in fares, service levels, and funding. The survey found that nearly half of these transit providers have either reduced service or increased fares over a two-year period, primarily because of decreases in operational funding.

For more information, contact Jeremy Mattson at jeremy.w.mattson@ndsu.edu. The publication can be downloaded at the following link: Marginal Cost Pricing and Subsidy of Transit in Small Urban Areas (pdf)