1. Against provision of Public Transport Mike, Ben, Laura, James, Ria

2. Background Yes, we are doing the argument against, but public transport, tends to be a merit good. It is underconsumed and overpriced by using the market mechanism, because the alternative, private transport causes congestion and pollution. Is the provision of public transport necessarily the best option then? It may be that subsidisation is more appropriate.

3. Opportunity Cost “The next best alternative foregone” The government fiscal (tax) revenue will be fixed in the short-term. Therefore, providing public transport for free (i.e. heavy subsidisation) reduces public spending budget for other activities designed to improve economic welfare. I.e. by choosing ‘public transport’, the government has forfeited: Healthcare is essential to the well-being of the population. Ill people are not economically productive, hence reducing economic growth. Education increases human capital (i.e. productivity of workers) – without free education, people may have fewer skills, reducing investment into UK and so economic growth Housing provision is a basic human need, and right. Social problems such as crime may lead on from lack of housing.

4. Quality of Services If no revenue is produced from providing the services, then there is no entrepreneurial incentive to improve quality through reinvestment Likewise, a lack of competition reduces innovation – perhaps also reducing motivation of staff to be efficient and ‘on time’ If public transport is delayed, then car ownership will increase and congestion will decline further

5. Higher Taxation Again, if no revenue is generated from running the services, then to reduce opportunity cost in other areas, taxes e.g. VAT, income tax will increase to pay for services. This reduces consumer welfare:

6. Ineffective Subsidies Public transport is price inelastic in demand. A hypothesis for this is: Each consumer group acts in own best interests. There are only 2 alternatives: Segment 1 – Has car, uses it is perceived to be convenient – switching cost large Segment 2 – doesn’t have a car, uses public transport for all local journey’s so switching cost is expensive (cost of car) Segment 3 – has a car but uses public transport for long commutes and perceives city parking as bad So perceived switching cost is high in each case, hence relatively price inelastic. Only small change in demand – subsidy is pointless

7. Aim for providing public transport If we are to consider alternatives, we have to consider the three aims first: Aim 1. Reduce pollution hence economic/social effect on country Aim 2. No room to build roads into city centre Aim 3. Segment of economy not enough money to operate car  economic growth cannot occur if they cannot access employment (immobility)  If the government want to provide public transport – it would be trying to solve these aims.

8. Aim 1 To reduce the third party impacts of pollution (an external cost for which no appropriate compensation has been paid)  Possible Alternatives: incentivise the use of cars with lower emissions, car pooling (making people share cars), tax car use progressively  The economic idea: By providing public transport, there is effectively the same effect as a flat rate tax to reduce demand, and hence consumption of the goods – it internalizes the externality by encouraging polluter to switch to alternatives Before After Social optimum market clearing level Free market equilibrium

9. Aim 2 Reduce demand for greater supply of roads in CBD due to lack of space  Economic idea: If public transport is used, then fewer private cars will “clog” up roads, reducing congestion and delays – supply is assumed to be fully inelastic due to lack of space  Alternative: demand management (congestion charges, COE, ERP) and through progressive taxation again

10. Aim 3 Increasing mobility of workers to increase potential economic growth, a key macroeconomic objective.  Economic Idea: Greater mobility = ease of recruitment and less absenteeism.  Alternative: incentivise building of industrial estates near residential zones so employees can walk to work – conflict of interests? Of course, mobility is not the only determinant e.g. September 11 th 2001 terrorist attacks.

11. Other Solutions

12. Use of PPP’s Public-Private Partnerships can be used to reduce burden on governmental fiscal revenue while ensuring efficiency and competition. The downside is that consumption may be more expensive than if publicly funded due to private sector requiring profits

13. Improving Telecommunications Infrastructure By increasing amount of employees that can work from home, roads are less demanded, and then people can live in rural areas without public transport It is no surprise therefore that the Scottish Highlands were first to get ISDN.

14. Real Life Situation Regulation of the supply of transport capacity relates to both safety regulation and economic regulation. Transport economics considers issues of the economic regulation of the supply of transport, particularly in relation to whether transport services and networks are provided by the public sector (i.e. socially), by the private sector (i.e. competitively) or using a mixture of both. Transport networks and services can take on any combination of regulated/deregulated and public/private provision. For example, bus services in the UK outside London are provided by both the public and private sectors in a deregulated economic environment (where no-one specifies which services are to be provided, so the provision of services is influenced by the market), whereas bus services within London are provided by the private sector in a regulated economic environment (where the public sector specifies the services to be provided and the private sector competes for the right to supply those services - i.e. franchising).

15. Conclusion There may be better alternatives to solving objectives mentioned, subsidies do not work on inelastic goods and ultimately, spending on public transport incurs an opportunity cost of having fewer scarce funds to spend in other, arguably more important areas. A potential problem with public transport is that if it is over-relied on, then permanent immobility is caused if the system faults e.g. strikes. Chavs will probably just vandalize public transport anyway, and then it will induce its own negative externalities.

16. Video – Dave Chapelle’s Opinion http://www.youtube.com/watch?v=bI55ie5Eo7E&fe ature=related