The proposed cuts in metro-area bus service announced Monday are bad news, but they do illustrate several economic principles. One can only hope that sound economic analysis may identify measures to cushion the harm from reduced service.
I should acknowledge upfront that my views on public transit are influenced by my experiences living in Brazil in 1969-70. The public transportation system in Rio de Janeiro was marvelous, at least for an adventurous 18-year-old. Rio’s metro area was bigger than Hennepin and Ramsey counties, with a population greater than all of Minnesota today, but I could get virtually anywhere on one or two buses. Most lines ran so frequently 21 hours a day that schedules were not necessary. One just went to the street and caught the next bus, never waiting more than a few minutes. Most lines were privately owned, not publicly subsidized. Fares were low.
The buses were uncomfortable by contemporary U.S. standards, and often crowded during rush hour. The accident rates were horrifying. On the whole, however, the system worked well. The situation in Rio 35 years ago may never apply to the Twin Cities. But it might provide some insights on why transit systems succeed or fail.
A key question for Metro Transit is: How do small decreases or increases in service affect both revenue and costs? If, on lightly used routes, marginal revenue is less than marginal cost, then service cutbacks will reduce operating deficits.
This is the rationale for the proposed service reductions and may be true for some routes. One crucial assumption, however, is that there are no external benefits or costs to the routes being pruned and that there are no “network effects.” More on that later.
One problem is that as a system’s service is cut, you may reduce total expenditures, but the cost per ride rises. Moreover, since many costs are fixed, especially in the short run, a 10 percent cut in bus miles driven will cut overall costs by much less than 10 percent.
Transit systems the size of the MTC tend to have economies of scale. That is, average costs drop as the overall size of the system increases. Maintenance facilities for 800 buses don’t cost twice as much as ones for 400 buses. A Web site and call center to serve a million riders does not cost twice as much as one servicing 500,000.
All of this means that cutting routes and costs is a problematic strategy for transit systems, even when forced by fiscal necessity. The dilemma is aggravated by “network effects.”
A network effect is often defined as “the phenomenon whereby a service becomes more valuable as more people use it.” People rode the bus in Rio because they could not afford cars. But buses were also attractive because one could get anywhere and waits for buses were short. The more people ride the bus, the lower the average costs of service and the more profitable it is to increase routes and schedules. One can enter a virtuous circle where increasing ridership actually improves service, which further improves ridership.
The problem is that many U.S. transit systems like the MTC are headed in an opposite direction, caught in a vicious circle. Pruning service diminishes the overall attractiveness of riding the bus. Ridership falls, further cuts are made, and the system eventually enters a death spiral.
Path dependency also plays a role. The population density in Rio is high because as the city grew, few people had cars. The higher the population density, the lower the cost of mass transit. Availability of transit reduces demand for cars and reinforces high-density housing. But when an urban area is built up with cheap automobiles and subsidized roads, as was most of the Twin Cities area, population densities are lower and establishing transit systems later is difficult and costly.
To justify subsidies to something like transit, there should be benefits to society beyond those riding the bus. Transit has such external benefits, although people may argue about how much weight should be given to them. Sixty people on a bus may mean 45 fewer cars on I-35W or I-394. The remaining auto drivers benefit from reduced congestion. For two-earner households, availability of reliable transit may permit forgoing a second car. Even for those who drive to work most days, the contingency value of being able to catch a bus when the alley is still blocked by snow or the car is in the shop may be worth a lot. Liberals tend to see lots of externalities in transit, conservatives few.
Conservative critics make an important point that policies mitigate against any private sector responses to transit needs. Regulation increases the cost of cab service and establishing for-profit van routes, for example, is extremely difficult. In low-income neighborhoods, particularly those with large immigrant communities, it’s common to find “informal” networks of drivers offering rides for a few dollars, but middle-class people don’t even know they exist.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.