It is all right if public transit does not recover all its costs in fares. Its benefits extend beyond the fare-paying riders; consequently those receiving its benefits should help pay for its costs. This can be done through public funding.
Public transit has better fuel economy, so everyone (not just the public transit riders) benefits by having cleaner air and less global warming.
People taking public transit cause fewer cars on the road. Regular drivers benefit from decreased congestion.
Although some drivers will not regularly take public transit, it serves as a backup mode of transportation if their car should become suddenly unavailable, for example, due to being out for repair. Public transit is a shared risk-reduction mechanism.
If public transit were not available, a business would have to provide a large parking lot to attract car-driving customers. Businesses benefit from public transit by having lower property costs.
A tourist destination becomes more expensive, and therefore less attractive, if the tourist must rent a car there in order to get around. Public transit benefits the local economy via the tourism dollars.
Thus, public transit should not be forced to increase fares to meet its operating budget. Public transit benefits everyone, so it should receive public funding.
Unsolved problems: What is the socially optimal geographical coverage and schedule frequency? What is the socially optimal rider fare (probably not zero)? How can a public transit agency be induced to provide the best service it can for the funding it gets? Public transit usually operates as a monopoly, so the capitalist optimization effect of the competitive market does not occur.
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