| Abstract: |
Public transit systems differ from many other government enterprises in that
they charge a fee, or fare, in much the way that private businesses charge for
their services. Transit fares are typically of two sorts: flat or
differentiated. For decades transportation scholars have argued in favor of
flexible, differentiated transit fares, which vary by mode, distance, and/or
time-of-day to reflect differences in the marginal costs of service provision
(Cervero and Wachs 1982; Cervero 1981; Hodge 1995). Such fare policies,
researchers contend, could greatly increase the efficiency, efficacy, and
equity of transit service. Research on transit costs suggests that short,
off-peak trips tend to be relatively inexpensive to provide, while longer,
peak-period trips are more expensive (Taylor, Garrett, and Iseki 2000).
Accordingly, varying fares to reflect these differences in costs would
encourage passengers to consume more inexpensive-to-serve trips, and be more
judicious in consuming more expensive-to-serve trips, thereby increasing the
cost-effectiveness of transit service. Recent technological advances,
particularly smart cards, have greatly reduced the operational and
administrative obstacles to charging differentiated time- or distance-based
fares. However, despite an established body of research on the potential
benefits of flexible fares, relatively few transit agencies employ them, and
over the past two decades many have actually moved away from variable fare
structures and toward simpler fares by dropping zonebased fares. And while
many U.S. transit agencies that have adopted smart card technology, very few
of these adopting agencies have moved toward variable fares. The
increasingly widespread implementation of smart farecards makes implementing
variable pricing far easier and more reliable than in years past. As smart
cards become more ubiquitous, will transit systems gradually reverse course
and begin implementing differentiated fares? Will political and institutional
resistance to variable pricing hold firm, suggesting that implementation was
never the principal obstacle? Or have flat fares become so thoroughly
inculcated in transit practice that most transit managers are unaware of the
now decades old research on the benefits of differentiated fares? This report
explores these questions. To better understand motivations for fare changes
and the potential for implementing marginal cost pricing, we reviewed the
literature on transit fares and pricing, conducted indepth interviews with
California transit officials, and administered a nationwide survey of transit
agency CEOs, planners and analysts, and board members on the goals that shape
fare policies. Collectively, these interviews and survey find that, with
respect to fare policies, transit agencies tend to be reactive to budgetary
pressures and reluctant to change fare structures when changing fare levels.
Despite this observed lack of strategic thinking with respect to fares, we do
see in our survey data some, albeit limited, interest in distance- and
time-based fares, especially among agencies that have or soon will introduce
smart cards. But any opportunities to move toward differentiated fares created
by smartcard adoption are constrained by an industry where simple, flat fares
are the norm and were transit managers are risk-averse and seek to minimize
public scrutiny and criticism. Smart cards, in other words, are a necessary
but not sufficient means of fare innovation in public transit. Beyond this
general observation, our interview and survey results collectively suggest
three specific findings with respect to transit fare setting:Â 1. With
respect to fare policies, transit agencies tend to be reactive to budgetary
pressures and reluctant to change fare structures when changing fare levels.Â
Our survey results find that systematic evaluations of fare policies are
subject to and often displaced by the immediate needs of an agency’s budget.
Respondents indicated that the primary consideration for changing fares is
budgetary need, implying a focus on near-term responses to fiscal shortfalls
in setting fare policies. Changing fare policies to improve farebox recovery
ratios, possibly through marginal cost pricing, which research suggests may
improve a given agency’s fiscal health over the long term received
considerably less consideration. Rational (i.e., cost- or criteria-based) fare
setting policies are viewed as important, but in practice the setting of
transit fares appears to be almost exclusively budget-driven and fare
increases are more often than not induced by fiscal crises. Because transit
systems depend so heavily on subsidies, large swings in tax revenues –
especially during the current, prolonged economic downturn – can make
transit budgets volatile. When rising costs and/or cuts in subsidies threaten
service, fare increases are often put on the table in conjunction with service
cuts – at what some would argue is precisely the wrong time. While
economists have long asserted the superiority of cost-based pricing on
economic efficiency grounds, agency policy setting driven by near-term
budgetary volatility almost certainly limits reflection on and adoption of
such strategies. This finding also suggests that the crisis-induced and
budget-driven fare setting processes may not themselves be the problem, but
rather are a manifestation of unclear or contradictory goals. Clearly defined
and congruent agency goals and objectives allow staff to work toward given
objectives, and board members to defend their decisions in light of these v
objectives. But given the often competing and contradictory goals for public
transit (reduce congestion and emissions, serve the needs of the poor and
disabled, keep subsidies low, provide quality employment for workers, keep
fares low, etc.), goal-driven pricing of transit services has proven
elusive. 2. There is some, albeit limited, interest in distance- and
time-based fares, especially among agencies that have or soon will introduce
smart cards. While scholars and researchers have long argued for transit
pricing based on principles of economic efficiency, in practice, most agencies
pursue fare policies that appear to favor administrative efficiency (e.g.
keeping fare collection simple) and effectiveness (e.g. simple and low transit
fares, unlimited use passes that reward frequent riders). Our survey results
underscore that even with increasing technological ability to do so, a
majority transit agencies are unlikely to implement distance-based or
time-of-day pricing anytime in the near future. According to the American
Public Transportation Association (APTA) (2012), 23 percent of transit
operators nationwide currently employ some form of distance-based fare pricing
and just 6 percent time of day pricing. While only 6 percent of the
respondents to our survey who had recently adopted smart cards reported a move
to time- or distance-based pricing as a result, nearly a quarter (24%) of
those planning to adopt smart cards said that they expect to use them to
implement some form of distance-based pricing, and fully 18 percent report the
same for time-of-day pricing. This suggests that while resistance to variable
pricing remains widespread, at least some of this resistance is likely due to
the operational challenges of implementing differentiated pricing in the
absence of smart cards. And as those operational vi challenges are reduced by
smartcards, the longstanding trend away from differentiated fares may begin to
reverse. 3. Transit agencies are risk-averse and seek to minimize public
scrutiny of any fare changes. Our survey results emphasize that transit
officials seek to ensure their actions avoid public scrutiny and negative
publicity, which substantially inhibits implementing variable cost pricing for
two reasons. First, implementing variable fare pricing in almost all cases
would be a radical departure from the flat fare status quo, and would thus
subject a transit agency to financial scrutiny, heightened media attention,
and increased lawmaker inquiry – all of which transit officials report they
seek to avoid. Secondly, the transit managers we surveyed report that any fare
increases will subject their agency to public scrutiny. Concerns over the
negative consequences of fare changes appear to be so embedded that transit
managers report focusing far more on the riders they might lose from any fare
changes than the riders they might gain by implementing, for example, variable
fares. They are, in other words, highly loss averse. Finally, the transit
agency representatives we interviewed collectively reported that they have
generally not conducted market research on non-riders or on customer responses
to alternative fare structures, and that they have little understanding of the
likely ridership gains and losses that might accompany distance- or time-based
pricing. But despite the many potential benefits of marginal cost-based
transit pricing touted in the literature, our interviews found significant
evidence of risk-aversion, goal obfuscation, and cost confusion among transit
managers, as predicted by the literature on public administration. The
interviews revealed, with sometimes surprising candor, how little some senior
transit managers understand their costs of service provision and how they
vary. This lack of cost comprehension may be the inevitable result of
government agencies’ mandate to maintain service without regard to cost or
vice versa (Flam, Persson, and Svensson 1982). We hypothesize that transit
agencies’ mission ambiguity is a leading explanatory factor of the context
in which a poor understanding of costs can persist. As has been argued in the
literature, this lack of cost comprehension is manifest in the crude ways in
which transit fares are set, despite advances in technology that can
facilitate a movement away from costabstracted, flat, and uniform fares and
toward the cost-specific fares that vary based that cost of service provided.
Our findings also suggest that the crisis-induced and budget-driven fare
setting processes may be not the cause, but the effect of unclear or
altogether absent goals. Even when a de facto pursuit of transit fare pricing
effectiveness is evident, the absence of explicit goals to which agency
decision-makers can refer, can mean that necessary, routine incremental fare
increases are deferred until a distracting and destructive budgetary crisis
forces a much larger and more disruptive fare increase on riders. This
research suggests that transit agencies could avoid the contentious, fraught,
and high-stakes “crises†that currently is all but a sine qua non for
raising fares, while offering “fairer†fares that could increase ridership
and revenue. However, the transit agency officials we interviewed reported
having little information about whether such practices actually affect
transit’s mode share. Several interviewees reported that they would expect
to lose riders with any form of marginal-cost fare pricing, but had no idea
whether or how they might gain additional riders under such a schema.
Distance-based pricing, for example, could attract passenger for new,
inexpensively priced short-trip riders who might have previously found $1.50
for a four block ride to be too much. The extent to which ridership would
change depends on the urban context, economic conditions, traveler
demographics, and so on; with information on these factors the ridership
effects of fare structure changes could be estimated. Absent such information,
any move to distance- or time-based pricing is a decidedly risky policy
pursuit. Our interviewees also speculated that the larger the sources of
operating and capital subsidies, the less likely it is that an agency’s
managers will focus on farebox recovery ratios. This argument, echoed in the
literature (Vrooman 1978; Flam, Persson, and Svensson 1982; Pickrell 1989),
suggests that public subsidies have the perverse effect of reducing
costefficiency and promoting subsequent budgetary crises. Transit officials
also report that in a world where driving is cheap and preferred, transit
officials have little choice but to maintain low fares in order to encourage
mode shift. Given this unlevel playing field, then, the non-pursuit of
marginal cost pricing may be reasonable to expect. But it also suggests that
transit officials should support pricing policies such as congestion tolling
and parking pricing, which help to internalize the costs of driving. However,
our survey results show that transit officials tend to oppose, or are at best
lukewarm toward, efforts to pricing the externalities of automobile travel.
Just four in 10 of those surveyed support market-rate pricing on on-street
parking, and just 27 percent support high occupancy/ toll (HOT) lanes; this
contrasts dramatically with seven in 10 who support increased carpooling. |