Lowering subway fares would save energy and make cities greener.
Subway ridership has fallen sharply around the world due to COVID-19. For most of the 170+ subway systems worldwide it is going to be a long time before ridership gets back to pre-COVID levels. The sharp drop in revenue is squeezing transportation budgets, making now an opportune time to think more broadly about how to fund urban rail.
For today’s blog, I want to imagine a world where you don’t have to wait in line to buy a subway ticket, or help your kids through the turnstiles. I want to imagine a world where subways are free.
In a new Energy Institute working paper (here), I estimate the price elasticity of demand for subways using evidence from Mexico City, Guadalajara, and Monterrey. One of the natural experiments I examine in the paper is a fare “holiday” that was successful in attracting new riders and has made me wonder whether we should be doing this all the time and everywhere.
I’m not sure what the right answer is, and I’m sure readers will chime in with other considerations, but in my view there are five economic arguments for making subways free.
#1. Low Marginal Cost
It is expensive to build subways. Recent expansions to the New York City subway, for example, cost more than $2 billion per mile. But subway construction is a fixed cost — not a marginal cost. Once the subway has been built, those capital costs are sunk and do not change if you add more trips.
It does take more energy to move a full train than an empty train, but the marginal energy consumption per additional passenger trip is very small. For example, I find that an additional passenger trip in the Mexico City subway increases total system electricity consumption by less than one-third of a kilowatt hour. Electricity is expensive in Mexico, but this still implies a marginal cost of only about 4 cents per passenger trip.
It is well known that rail travel is highly-fuel efficient compared to private vehicles, using less than 1/10th as much energy per passenger mile. Steel-on-steel wheels have 85% less rolling friction losses compared to tires on a road, and make far fewer stops than private vehicles in urban driving.
Off-peak most subway systems can accommodate significant increases in trips without crowding. On-peak, however, crowding is the more significant marginal cost, particularly now due to COVID. Subway operators try to address crowding by adding trains — which has both costs and benefits as I discuss later.
#2. Low Externalities
The marginal external cost of subways is low too. When you use less energy, you create less negative energy-related externalities. In addition, two-thirds of urban rail systems worldwide are electrified, so are becoming cleaner as electricity becomes less carbon-intensive.
In contrast, the alternatives to subways use more energy and impose additional costs. Private vehicles, ride sharing, and even bus transit all create local pollution, traffic congestion, and accidents.
When economists account for the costs of the alternatives, they’ve concluded that the optimal price for urban rail transit is often negative. The benefits of getting vehicles off the roads are that large. See, in particular, work by Ian Parry and coauthors here and here. Of course, it would not actually make sense to use negative prices because you would invite professional “riders”. But how about zero? Zero has a nice ring to it.
#3. Operational Efficiencies
I may be overly fixated on these operational efficiencies, but I love the idea that you’d never again need to wait in line to buy a ticket. No annoying turnstiles. No enforcement. It would be particularly nice for visiting other cities. No need to figure out the pricing system, or buy a new card. Just walk in and get on a train.
There would also be significant cost savings for subway operators. I don’t know how much electronic ticket kiosks cost, but they can’t be cheap, and in addition to the capital costs I’m sure they require frequent maintenance and replacement. There would be labor savings too, with fewer employees needed at subway stations.
#4. Redistributive and Stimulus Benefits
It depends on the city, but in many cities it tends to be lower-income, younger people, and more vulnerable groups who ride the subway. This is certainly the case for the three subways I study in Mexico, and has been shown in previous research. Thus in addition to the efficiency gains, making subways free would have positive redistributive benefits.
Putting resources in peoples’ pockets is particularly valuable today because it would act as economic stimulus. The U.S. unemployment rate in June 2020 is above 13%, so now is exactly the time that Keynesian-style economic stimulus makes the most sense.
#5. Dynamic Efficiencies
Finally, as economist Herbert Mohring pointed out 50 years ago, public transportation is an increasing returns-to-scale technology. The more riders in the system, the more you run the trains, and the shorter the wait times for all riders. If you make subways free, you’d increase ridership significantly, initiating this virtuous cycle.
Operations at peak would be the most challenging. Depending on the city, many subways are already running at or near maximum capacity during certain hours. These peak crowded hours are also when COVID transmission risks are highest. Still, this increasing-returns-to-scale idea is compelling because it suggests that subways may be an all-or-nothing proposition.
As we emerge from COVID-19, subways are in a bad equilibrium, with low ridership and infrequent service. With ride sharing increasingly available as a low-cost alternative, people are not going to wait 30 minutes for the next subway train. Making subways free could help flip the switch back to a better, more sustainable, equilibrium.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Davis, Lucas. “Five Arguments for Making Subways Free” Energy Institute Blog, UC Berkeley, June 29, 2020, https://energyathaas.wordpress.com/2020/06/29/five-arguments-for-making-subways-free/
For more see Lucas Davis, “Estimating the Price Elasticity of Demand for Subways: Evidence from Mexico” Energy Institute Working Paper, June 2020.
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.