Pricing the transit.

A mass transit system of any scale is a capital-intensive project and requires heavy financial resources. The economic benefits of the system, however, are much higher than the financial costs, due to which it is in the favour of governments to provide a transit system. Public transport forms a lifeline of cities as it allows people to access economic opportunities and earn a living. Apart from this direct economic benefit, there are more indirect benefits such as reduced air pollution, congestion, travel times, road accidents and such, that make transit systems more economical for all. In many developing countries, a large part of the society depends on transit as they do not have a choice of owning a personal vehicle due to lower affordability. For these reasons, many governments around the world subsidize the use of public transport so as to make it affordable for the public, without whom, there will be no public transport. In countries such as India, Germany, France, Nordic countries and others, which are ‘welfare states’ committed to protecting and promoting social and economic well-being of its citizens, public transport is counted as a ‘social good’. Social goods are never provided with the intention of making monetary profits. That is also the reason why most public transport systems around the world are not able to make profits, although some have been able to make operating profits. It is not common for transit systems to make profits after accounting for subsidies doled out by the governments.

There are however, other ways of making the service profitable, so that those profits can be used to improve the quality of the system, upgrading its infrastructure or its services for the benefit of the public. Most commonly, the land around transit nodes is used a resource to develop and earn revenues, provided that land is owned by them. Some examples are those of Hong Kong, Seoul, and Tokyo. What is important is, that cost of using the public transport must remain affordable for it to act like a public transport. However, different countries have their own reasons behind putting a particular price tag on use of transit service. For example, Delhi Metro and Amsterdam Metro have comparable facilities. In Delhi, a one-way journey on Delhi Metro to the farthest destination cost 60 INR in 2018, while a one-way journey on a Amsterdam Metro cost € 3.5 (and if discounted during off-peak hours, it cost € 2.4). Using the Big Mac Index[1] for 2018 (The Economist, 2018), clearly the fares of Amsterdam are much more than that of Delhi. However, there are many local factors that may be responsible for this difference.

In another example, during my lectures to international students in the Netherlands, some students pointed to the prohibitively high costs of using bus and train systems in the Netherlands comparing them to public transport systems in their own country. We all agreed that it is not the most prudent thing to compare systems of different countries because surely, there are differences between the level of service, cost of system, and many other factors. However, it became a rather interesting to me when they also confessed that they use it only because they have no choice. Now there are two things to understand from this example. Firstly – is Dutch public transport expensive in ‘absolute’ sense, or secondly, is it expensive ‘relative’ to other locally available modes of transport or is it both? All these factors affect the use of transit. Let us first discuss the first part. A recent study in European Union, Newmark (2019) reported that the Dutch transit system is most expensive, being about 35% more expensive than the average costs of transit systems in the Union. But, is expensive necessarily unaffordable? May be, may be not. To understand if a transit system, or any other commodity is expensive in absolute terms, it needs to be studied in context of the average affordability of the peopleLet us now discuss the second part. For any successful modal shift from polluting private modes of transport to public transport, it is important for the transit system to be attractive, user-friendly and it must be able to compete with private transport in terms of speed, comfort and cost. If the public transport system is not as cost-effective when compared to private transport, it is unlikely that people will shift from cars to public transport..

It is a common belief among people that fare revenues are critical for provision of a transit service. However, some recent developments in Europe will make you wonder if that is really true. Recently, there have been some interesting and encouraging examples from European countries who are have already or are planning to make their public transport free for their residents. Germany is planning to make public transport free is some of its cities like Essen, Bonn, Mannheim and others. Luxembourg plans to make it free all over the country from beginning of 2019 (Radu, 2018b). Estonia is also planning the same for 11 out of its 15 counties from summer of 2019  following the success of its capital city Tallinn that is already doing it since 2013 (Radu, 2018a). Almost 20 French cities like Dunkirk, have made their public transport completely or partially free. All these examples have become an inspiration for other cities, while also being criticized by other experts (King, 2017) (Newmark, 2019). Some experts believe that instead of completely free transit rides, that will lead to huge losses, fares should be means-tested or income-based. Interestingly, however, the Mayor of Dunkirk city explains that the fare revenue of public transport covered only about 10% of the entire cost of operations (although for bigger cities like Paris, the fare revenues make up for about 50% of the operational costs) (Willsher, 2018). This loss of financial revenue was compensated in Dunkirk by other sources of income while the social advantages have been huge. There has been increase in ridership to the tune of even 50% on some routes. He also explained how making the transit free, has changed the way people treat public transport now. Earlier, the people paid a small fee but felt to have bought the right to abuse it or mistreat it. Now, however, they feel more responsible towards it. Earlier, the system was considered to be useful only for elderly, students, or those who couldn’t drive. Now, the system is for everyone and people are experimenting by changing their travel choices and using buses instead of cars. Some researcher have, however, found that most of the ridership gains in such examples are because people who used to walk or cycle have shifted to public transport and not because people have made a shift from their cars.

Although the step to make public transport free remains debated, it has two very important features that must be remembered. Firstly, once implemented, it is impossible to go back and revert to the usual fare system. Public will not accept the change. Secondly, free transit service will increase ridership that will put pressure on the system’s capacity. If the transit capacity is not increased, comfort levels will reduce which will eventually push away the choice-riders. Hence, it becomes imperative to keep investing in transit services to keep them attractive to riders.

Cities in developing countries have to be aware of this possibility of sudden and extreme pressure on transit capacity and be prepared for it. If the existing system has no extra capacity and city authorities are not in a position to invest in the augmentation of transit service immediately or in near future, it is best not to experiment with this step. However, making transit free or discounted during off-peak hours should improve ridership during that time, leading to more efficient use of transit throughout the day. Public reaction to such a step is quite unpredictable but a major factor in success or failure of such a step. While the cities in Europe have experienced a very positive reaction, it would not be surprising if people in other countries tend to devalue or abuse the facility that is given to them for free. Many psychological, social and cultural factors are at play here. To conclude, affordability of public transport remains a key factor is inducing and encouraging transit use and there are many ways to achieve that, ranging from subsidizing to making it partially or completely free.


[1] The Big Mac Index is published every year by The Economist magazine and gives a measure of the purchasing power parity (PPP)  between nations. It is based on the theory that changes in exchange rates between currencies should affect the price that consumers pay for a Big Mac in a particular nation. Why the Big Mac? Because it is a top-selling McDonald’s burger and it is available in almost every country and manufactured in a standardized size, composition and quality. The Index is based on a survey done by The Economist  every year all over the world. To clarify further, purchasing power parity (PPP) states that the price of a good in one country should be equal to its price in another country, after adjusting for the exchange rate between the two countries. Segal T. (2018) What is the Big Mac Index? Available at: https://www.investopedia.com/ask/answers/09/big-mac-index.asp.

King EB. (2017) Want a free ride? French cities opt for free public transport. France24. France24.

Newmark Z. (2019) Netherlands most expensive in EU for transit costs. NL Times.

Radu S. (2018a) The country with no public transport fares. U.S. News & World report.

Radu S. (2018b) Luxembourg to make public transport free for all. U.S. News & World report.

Segal T. (2018) What is the Big Mac Index? Available at: https://www.investopedia.com/ask/answers/09/big-mac-index.asp.

Singh P. (2018) Purchasing Power Parity: the Big Mac Index. Available at: https://www.investopedia.com/articles/fundamental-analysis/ppp-big-mac.asp.

TheEconomist. (2018) Big Mac Index – global prices for a Big Mac in July 2018, by country (in U.S. Dollars). Available at: https://www.statista.com/statistics/274326/big-mac-index-global-prices-for-a-big-mac/.

Willsher K. (2018) ‘I leave the car at home’: how free buses are revolutionising one French city. The Guardian. The International Edition ed.

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