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Using Demand Elasticities to “Balance” Transit Fares and Service Levels

Using Demand Elasticities to “Balance” Transit Fares and Service Levels. Ian Savage Northwestern University. My basic thesis . . .

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Using Demand Elasticities to “Balance” Transit Fares and Service Levels

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  1. Using Demand Elasticities to“Balance” Transit Fares and Service Levels Ian Savage Northwestern University

  2. My basic thesis . . . “Acceptance of inflation-indexing of fares is dependent on convincing people that fares have been set in accordance with the same level of professional determination as service frequency, rather than being set at an arbitrary level based on some historical or political precedent”

  3. Travel demand models . . . • Concept of “generalized cost” of travel = fare + valuation of time + valuation of other attributes (positive and negative) • Traveler compares generalized cost of competing modes (“mode choice”) • Time taken comprises access/egress time, wait time, in-vehicle time, interchange time • Transit access/egress time and wait time inversely related to density of routes and frequency of service • Time taken is inversely related to service levels

  4. Transit demand . . . • Demand (Q) = f (P,VM-1,X,Y) P = fare VM = vehicle-miles (service level) X = other demand variables outside control of transit agency (“exogenous”) Y = other demand variables under control of transit agency (“endogenous”) • Considerable empirical evidence on elasticities

  5. Data on elasticities . . . • Richard Balcombe (editor), The Demand for Public Transport: A Practical Guide, Report TRL593, Crowthorne, UK: TRL Limited, 2004 • Transit Cooperative Research Program, Traveler Response to Transportation System Changes, chapters 9 (service level), 10 (service coverage), 12 (fares), Transportation Research Board, 2004

  6. Definition of price elasticity . . . • eq,p = % change in demand divided by % change in price • Usually negative • All evidence is 0 > eq,p > -1 or “inelastic” • Fare increase leads to increased farebox revenue • Fare decrease leads to decreased farebox revenue

  7. Fare elasticities vary by mode and time... • Longer-run elasticities in range -0.6 to -1.0

  8. Suggests time-of-day pricing . . . • Price increases in the peak produce largest increases in revenue with loss of the least amount of riders • Off-peak fare discounts are the most effective at increasing ridership • Reverse of most transit pricing? • “Ramsey pricing” can increase ridership while generating same amount of revenue

  9. Overall service elasticity . . . • eq,vm = % change in demand divided by % change in vehicle-miles • Bus short-run elasticity of +0.4, long-run elasticity of +0.7 • More sensitive in evenings and Sundays

  10. Revenues and costs . . . • Total Farebox revenue = P*f(P,VM-1,X,Y) • Total Cost = c(VM) • With subsidy of $B, budget constraint is: P*f(P,VM-1,X,Y) + B = c(VM) • Multiple combinations of fare and service level satisfy this budget constraint

  11. Objectives of the transit agency . . . • Objectives are constrained by amount of subsidy available ($B) • Credible objective is maximizing social benefit • A proxy for total social benefit is ridership (passenger-miles, passenger trips) • Should some trips be weighted more than others?

  12. Balance point . . . • The combination of P* and VM* is called the “balance point” • Maximizing Q = f (P,VM-1,X,Y) subject to constraint P*f(P,VM-1,X,Y) + B = c(VM) • P and VM are the agency’s choice variables • Knowledge of price elasticities crucial to empirically finding the balance point

  13. Balance point . . . • The balance point maximizes user benefits / ridership. • Once you are at the balance point, logical to suggest that the real value of P* should be maintained by indexing

  14. Getting to the balance point . . . • Values of P* and VM* may vary by mode and time of day • The current combination of fare and frequency may be more out of line at some times of day and on some modes compared with other times and modes

  15. Benefits per $1 of subsidy . . .

  16. Getting to the balance point . . . • Discounted fare in off-peak, especially on the bus system • Too much peak-period capacity in both modes • Somewhat excessive weekend rail capacity

  17. What about costs? . . . • Cost reduction will improve benefit-cost ratio of providing extra service • But will not affect benefit-cost of changing fares

  18. If unit costs fell by 20% . . .

  19. Cost reduction . . . • In this case has restored more of a balance between fares and service levels • Bus passengers have been at a disadvantage compared with rail passengers • Still advantageous to provide a price discount and extra service in the bus mode in the off-peak by reducing capacity in the peak

  20. In summary . . . • Fare and service elasticities vary by mode and time of day • Consequently, ridership-maximizing combination of fare / service level varies by mode and time of day • A fare schedule that is based on a strategy that maximizes ridership (user benefits) is more defensible if the agency wishes to index it against inflation • Casual empiricism from Chicago is that fares held constant for lengthy periods trigger a fiscal crisis (1957-65, 1970-79, 1992-2003)

  21. Contact Information: • ipsavage@northwestern.edu • (847) 491-8241 • www.econ.northwestern.edu Look under “faculty” tab to link to my personal web site

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