Reforming private and public
urban transport pricing
Stef ProostEconomics – KULeuven
ITF Roundtable – Auckland – Nov 2017

Road congestion in ParisAddressed with cheap public transport whichgave us ...

Metro in Paris at peak hours

Main message• In many metropolitan areas and in peak periods,
PT has a larger market share than private roadtransport and its pricing is suboptimal• Public Transport has an important role to play inurban areas, but– Cheap PT cannot substitute road pricing– Road pricing AND reform of PT pricing are necessary• Difficult political message, decentralisation ofpricing to city level may help

Outline• First principles of pricing of road and PT• Some numerical evidence– Stockholm– Paris• Getting political support for a pricing reform• Conclusions

First principles road pricing

First principles PT pricing + frequency

OPTIMAL FREQUENCYSecond best pricing of PT“DIVERSION RATIO” = ?0.15 to 0.35 ?
• When a reduction of fares of PT attracts 100 new passengers, 15 to 35 are ex carusers• If DIVERSION RATIO = 1, then pricing public transport is sufficient (except fordeficit financing)Outline• First principles of pricing of road and PT• Some numerical evidence– Stockholm (model of one corridor to the city but
probably good cross-price elasticity information)– Paris (“full” model of the city)• Getting political support for a pricing reform• Conclusions

STOCKHOLM CORRIDOR: Replace uniform bus prices by high peak bus
prices, and off peak prices can decrease to 0

STOCKHOLM CORRIDOR: If all prices are optimal, higher tolls on
cars and peak bus prices are not so much higher and subsidy forbus no longer neededSTOCKHOLM CORRIDOR: How low should peak bus prices be if
there would be no road tolls?

Conclude on Stockholm• Need for higher peak bus prices whether roadtolls are low or highParis: no road pricing – low PT prices

4 categories of travellers: rich/ poor and working/not working, living in 4 zones
Calibrated to traffic survey

Do we need to complement the introduction of zonal
road pricing of 3 Euro by an increase or a decrease of
the PT fares?
• An INCREASE in PT peak fares generates more welfare than aPT fare decrease.
• Why? PT peak prices are already too low and not covering
marginal operation costs so adding more users with low PT
fares reduces welfare• An increase in PT charges works better but hurts mainly thePOORER households when net toll revenues are redistributed
uniformly.
• When a double weighting is given to the utility change for thepoor , the total efficiency of a PT price increase is still higher
for society as a wholeOther elements• Paris introduced flat monthly pass so that price becomes virtuallyzero ?
• London shows the nice example with peak/off peak differentiations
and differentiations by zone

• Bottleneck congestion representation means steering finely
departure times– Pricing pays off much more – in limit generalised price does notincrease (one substitutes queuing by tolling)– For road but also for Public Transport• Pricing improves locational efficiency– Supply of public transport relocates economic activity but net gain(“wider economic benefits”) not clear

Outline• First principles of pricing of road and PT• Some numerical evidence– Stockholm (model of one corridor to city)– Paris (“full” model of the city)– Other elements• Getting political support for a pricing reform- Step 1: simple majority voting – fixed total demand- Step 2: simple majority voting – price-elastic PT demand- Step 3: why not decentralise pricing and investment
decisions?

• Conclusions

Reforming transport pricing is difficult– why?• When a total welfare gain exists, one can , intheory, via compensation make everybody
better off via redistribution policies BUT• Information asymetry: values of time andschedule delay costs are individual-specific:– everybody claims compensation…
– low income may be poor indicator of welfare loss

• Political mechanism decides

Z

MAJORITY EX ANTE AGAINST AND EX POST IN FAVOURCOMMUTING TRANSPORT TRIPS
Generalisedprice

MSC=Marginal socialcost
B
AC = Average costt*AcTotal trips
XB
Car useXC XA

NPT useWhere is the majority?
• Road pricing is a typical reform problem– Majority ex ante against but ex post in favour• because there is an expected loss for most car drivers – they don’tknow how easy it is to adapt..

– A referendum will not give a majority for an experiment• Because ex ante there is a loss for most drivers• Stockholm and London did not have a referendum before the test

• Promise to redistribute revenues to PT users via lower
PT prices is efficient and may help to find a majority– IF total number of trips is price-inelastic

Outline• First principles of pricing of road and PT• Some numerical evidence– Stockholm (model of one corridor to city)– Paris (“full” model of the city)– Other elements• Getting political support for a pricing reform- Step 1: simple majority voting – fixed total demand- Step 2: simple majority voting – price-elastic PT demand- Step 3: why not decentralise pricing and investment
decisions?

• Conclusions

What happens with PT subsidies when public
transport trips are price-elastic and diversion ratio(number of car users attracted) is small?
• Subsidy to PT attracts much more users – but this iscostly to accomodate• Once the PT prices are low, it is difficult to find amajority for the grand reform that is needed as bothcar users and PT users will object higher peak prices.

COMMUTING TRANSPORT TRIPSOTHER PT TRIPS

MSC Marginal social cost

AC Average cost

Vt**WTP for other PT tripsscs
W
XB
Car useXS XANPT use

YCYS

PT use for non-commuting

Outline• First principles of pricing of road and PT• Some numerical evidence– Stockholm (model of one corridor to city)– Paris (“full” model of the city)– Other elements• Getting political support for a pricing reform- Step 1: simple majority voting – fixed total demand- Step 2: simple majority voting – price-elastic PT demand- Step 3: why not decentralise pricing and investment
decisions?

• Conclusions

Decentralise pricing to themetropolitan level?
• Opportunity is there as fuel consumption (traditionaltax base) is disappearing in 10 years, in 20 years?
• Who can set prices?
– Federal government – but constitutionally it is difficult
to state that city A pays a different charge than city B– So differentiation of charges has to come fromdecentralised decision making

Advantages and problems ofdecentralised pricing• Costs of PT system will become clear• Use of city roads and PT system by outsiders forces thecities to charge at least the marginal cost and even more
– otherwise the inhabitants are subsidizing the outsiders– RISK of too large charges on road and PT– Can be solved by a federal constraint that forces cities toinvest all charge revenues into operation or infrastructure
extension – this together with non-discrimination between
inhabitants and outsiders guarantees optimal pricing andinvestment

Conclusions• Most cities have poor pricing of road transport
AND of public transport (large market share)• Low public transport prices only won’t solve
the road congestion issue• Peak pricing of road and PT users is needed• Obviously difficult political message• Making cities responsible for pricing can makeit easier