Careful analysis of above obtained data in particular for parameters like implemented peak frequency and excess time by bus (CO and NCO) we can draw conclusion towards occurrence of the Mohring Effects.
Mohring Effect:
In 1972, Herbert Mohring stated that the "Increase in bus frequency decreases the passengers travel time simultaneously causing increase in bus occupancy (demand). Increased bus occupancy reduces bus operator's running cost per passenger setting increase quantity of bus service (frequencies) resulting in reduced waiting time for commuters" (Herbert Mohr, 1972 "Optimization and scale economies in urban bus transportation").
Fig 2.1, 2.2 shows the graph for average generalized cost for non-car owners by bus vs peak km travelled (in thousands) by bus for five years in Do-Min, Do-Min with increased frequency of bus scenarios respectively.
Figure 1: Peak Km Travelled (in thousands) vs. Avg. Excess Time (in min) for Do-Min condition
Figure 2: Peak Km Travelled (in thousands) vs. Avg. Excess Time (in min) for five years for Increased Bus Frequency condition
Figure 3: Peak Km Travelled (in thousands) vs. Avg. Excess Time (in min) for five years for Reduced Fares condition
From the graph we see that in Fig 2.1 the generalized cost and peak km travelled (PAX) have moved in the same direction (increase mode) while in Fig 2.2 they are in opposite directions.
This can be explained using Mohring effect concept, the increase in bus frequency (i.e. quantity of service) steadily from 19 to 42 decreased passenger wait time at bus-stops. This allowed buses to transport more customers at one time. This increased demand towards the bus thus making environment more suitable for buses as compared to cars. This increased demand caused more people shift from using cars to bus utility. Fewer cars on roads resulted in less traffic congestion and hence reduced excess time by bus.
Price variation and its effect on elasticity
Elasticity of demand in general is the sensitivity of consumers towards the change in the price of goods (Jonathan Cowie, The Economics of Transport: A theoretical and applied perspective, pg.63). In transportation sector, the sensitivity of consumers is towards the change in price and service levels.
Figure 4: Frequency Elasticity for CO & NCO
Figure 5: Price Elasticity for CO & NCO
As we can observe from the table 2 &3 that the elasticity for Car Owners (CO) and Non-Car Owners (NCO) travelling by bus is within +1 to -1 hence we can say elasticity of bus service demand or elasticity due to cheaper fares are in-elastic in nature.
Also if we compare the values for average generalized cost for car-owners and non-car owners travelling by bus along with average excess time required by bus under Increased Frequency conditions are much less as compared for reduced fares (see table 2 & 3). Thus increased frequency is more economically viable
Generalized Cost:
Summation of all the cost items which influence the individual users to use particular mode of transport (Jonathan Cowie, The Economics of Transport: A theoretical and applied perspective). These includes monetary cost like fare cost, cost of ownership, fuel cost and parking cost if any in addition to monetary valued cost like time required to travel the journey and waiting time. Thus to benefit economically, average generalized cost should be as minimum as possible.
As from the figures below we can see that the average generalized cost for passengers travelling by bus (subsidized) is least. Reduction in generalized cost can be explained by considering subsidies. Subsidies (increased frequency or reduced fares) in bus increases passenger ridership causing increase in bus ridership demand. Thus operating cost per person for bus operators reduces. This reduction in operating cost allows them to introduce more number of prices for the same price which in-turn again increases the bus ridership. Thus now more people are travelling by bus rather than cars hence the unit running cost for cars per person increase. Also increased bus ridership helps in reducing traffic congestion and hence the average excess time required to commute.
TASK 3
Advantages:
Subsidy is the most important factor in transport industry. This is because it tends to helps in maintaining equilibrium between commercial and social interest.
Advantages of subsidies can be summarized as below
To promote efficient use of other mode of transport and lessen the impact on environment
In case of plutopia, before subsidization of public transport network the ratio of peak km travelled by cars and bus was approximately 2.5 to 3.0 causing traffic congestion which increased the average excess time required by bus. Subsidies helped in reducing this ratio and hence increase in modal shift from car to bus. This shift has caused increase in PAX for bus, reduction in average generalized cost for bus users (CO+NCO) and the average excess time required.
Reduction in average congestion means less congestion hence lesser impacts on the environment.
Support Economic Regeneration of the area and provide necessary social amenities
Barr, 2004 states that besides food, clothing and shelter, transport can be viewed as participative requirement i.e. some kind of minimum standards is required. Since not in everyone in plutopia has a car hence the need of public transport at economic rationales
Disadvantages:
Second Best Solution
Leads to in-efficient operations
Winner Curse Syndrome
Subsidies a service that doesn't requires subsidy
Arguments for Subsidization
Traditionally, three major justifications have been offered in support of government subsidies to transit. First, numerous social benefits arise from reducing auto travel, particularly improvements in traffic flows and air quality. Drivers do not pay the full marginal social costs of their vehicle use, including increased congestion, pollution, noise, and accidents (Delucchi 2004). In the absence of corrective taxes, which have proven exceedingly difficult to implement, a second-best alternative is to subsidize the automobile's main competitor, public transportation (Lewis and Williams 1999).
Distributional equity is another rationale. Increased investment in transit and subsidized fares expand the mobility options for low-income population. In an auto-dependent transportation system, poor households that cannot afford private vehicles may be limited in their ability to take advantage of economic opportunities. The provision of transit may reduce spatial barriers to employment, especially in large metropolitan areas (Holzer et al. 2001).
Third, there are economies of scale to transit investment, particularly for rail. Rail requires substantial investment in right of way and capital requirements that are relatively insensitive to the volume of passengers. Bus investment, while showing only modest economies
2 Resources for the Future Nelson et al.
of scale in terms of cost, demonstrates increasing returns to scale with respect to service provision. As transit frequencies increase, wait times decrease, demand increases, and transit frequencies can increase again (the so-called Mohring (1972) effect). Because marginal social cost is below average social cost for both rail and bus, setting fares equal to marginal social cost will be insufficient to cover the financial requirements of the system. From an economic efficiency perspective, this is the most compelling argument for subsidization, because the aforementioned issues can be addressed more effectively with other instruments (Vickrey 1980).2
Critics of public provision and subsidization of mass transit offer several rebuttals to these arguments (summarized in Small and Gomez-Ibanez 1999). First, the cross-price elasticities of auto usage with respect to transit costs are rather small (Hensher 1997), indicating that subsidizing transit may be a relatively inefficient way to discourage automobile use. Transit own-price elasticities are typically low as well-on the order of -0.33 to -0.22 (Kain and Liu 1999; Gillen 1994)-implying that the social benefit from pricing at marginal cost versus average cost may not be very high. On the issue of equity, transit users in dense urban areas are often relatively affluent, and the transfer of income from taxpayers to transit users may not have the desired distributional effects.
