Fare pricing and reform

A member of the public at a rally for Free/Reduced Student Passes in Oakland, Photo by J. Moses Ceasar 2005

Introduction

Most transit agencies employ largely flat fare systems, which charge the same price, regardless of time of day, distance or direction traveled, or quality of service. However, they do not reflect the actual costs of providing service, which constantly fluctuate throughout the day. Peak period operation, longer trip routes, and premium service all cost the agency more money to operate, and require more capital investments. Additionally, there is the issue of "cross-subsidization"; since flat fares do not distinguish between time, type, or distance of travel, transit users traveling shorter distances, during off-peak hours, and using non-premium services “cross-subsidize” riders on more expensive routes. There is a considerable body of research that argue in favor of flexible, differentiated fares. There are also other fare strategies that transit agencies can consider, such as using smartcard technology, eliminating fares altogether, or providing group fares or other discounts.

Differentiated Pricing

Most transit systems have flat fares, but others use differentiated fares based on time (peak vs. off-peak) or distance traveled. Differentiated fares are more efficient because they better reflect the variable costs of transit service, encourage riders to travel when excess capacity is available, and subsidize all types of riders roughly equally. Some transit agencies worry about losing riders after switching to differentiated pricing, but new fare system can incentivize additional short rides by making them cheaper. More research is needed to draw broader conclusions on the effect on ridership of moving from flat to differentiated fares.

Any new fare system is going to raise concerns about equity; if low-income riders have longer trips then they will be disproportionately impacted by differentiated pricing. This effect is highly dependent on local settlement patterns. One study in Utah found that a switch to differentiated pricing in a certain part of the Utah Transit Authority's service area would be progressive, reducing fares for low-income and minority riders. This isn't necessarily transferable to other areas, though; agencies looking to make the switch will have to do their own Title VI analyses.

In recent decades automated fare media has greatly simplified the process of collecting differentiated fares. However, many agencies are still wary of the perceived complexity and unpopularity of time- and distance- based fares, and if anything in recent years more agencies have returned to flat fare systems.

Types of Differentiated Pricing Schemes

Automated fare payment technologies can allow agencies (or groups of agencies) to implement novel fare policies, many of which would not be possible through traditional fare media (e.g. cash, tickets, tokens). These types of fare policies can be grouped into the three categories, including loyalty programs, distance-based fares, and differential pricing . Loyalty programs aim to reward customers for frequent transit use, and primarily include either discounted fares or bonus rides. Distance-based pricing involves charging customers based on how far they travel, while differential pricing sets fees according to where or how customers ride transit. These categories include the fare policies listed below:

• Loyalty Programs
  • Calendar Passes: unlimited-ride passes valid during a set period of time
  • Rolling Passes: unlimited-ride passes during a period of days after activation
  • Joint Bus/Rail Passes: passes which allow transfers across transit mode
  • Mode-Specific Passes: unlimited rides on a particular mode
  • Bonus Fares: free trips are provided for frequent transit use
  • Fare Capping: trips are free after a given amount is paid within a given time period
• Distance-Based
  • Mileage-Based: fare is charged based on distance traveled
  • Zone-Based: fare is charged based on number of geographical “zones” traversed
  • Flat Fare: a constant fare is charged regardless of distance traveled
• Differential Pricing
  • Fare Differential: variation in fare according to which payment media is used
  • Location-Based: variation in fare according to origin or destination location
  • Service-Based: variation in fare according to mode of travel (e.g. subway, bus, streetcar)
  • Peak/Off-Peak: variation in fare according to time period of travel
  • Event-Based: fare products targeted to attendees of special events

Los Angeles MTA Study

In 2010, Los Angeles Metro looked at the potential for time and distance-based fares for the MTA bus and rail system.

The time-based system would give riders a window of time during which subsequent boardings would not require payment. Transfer fees would be eliminated during that time period. A simple way to implement this would be to use the TAP cards, although the agency would have to look into additional hardware to vend receipts if it wanted to accommodate cash-paying riders as well. One important implication is this system would encourage riders to use the fastest services available, since they would be granted a narrow time window of free transfers. Base fares may have to be increased, since transfer fare revenues will be lost.

The distance-based system could apply to Rapid and Express buses, to heavy rail, or to all rail lines. Fares would be based on increments of distance, with corresponding fare zone boundaries identified for each route. While existing hardware and fare media could be used, the agency might have to install fare gates or hire additional people for fare enforcement. An overall concern with a distance-based system is some riders may choose slower, cheaper parallel services because they cannot afford to pay a premium fare.

Group Fares

Transit agencies can offer deep discount group passes to employers and universities. In a 2004 dissertation, Cornelius Nuworsoo explores the benefits of discounted fare programs for groups and summarizes the outcomes of unlimited-ride pass programs in Berkeley and Denver. There is an associated Access Magazine article that can be found on the Access website at http://www.accessmagazine.org

Fare Integration

Another key component of modern fare reform is fare integration. This is particular equity concern as city housing prices rise, pushing people further away from the center. This poses an extra burden on low-income commuters who often have to pay multiple different agencies' fares for their commute.

This has been a particularly pressing issue for the Bay Area where there are 27 transit operators with " a dizzying array of fare structures". In September 2019 the Clipper Executive Board, representing major transit operators in the Area, approved funds to study the possibility of fare coordination.

Impacts of Fare Integration on Transit Ridership

Academic literature has demonstrated links between fare integration and transit ridership. A positive impact has been shown in numerous contexts, as explored by Sharaby and Shiftan through a case study in Haifa, Israel and a review of similar policy implementation throughout Europe and the United States . The impacts of various fare integration programs are shown in the table below. In many cases, these programs successfully reversed a trend of ridership decrease and encouraged sustained ridership growth for extended periods after implementation.

Sample fare integration programs and ridership impact

Region	Year of Implementation	Ridership Increase
Greater Manchester, England	1999-2001	4%
New York, USA	1994-1999	12% (subway), 40% (bus)
Vienna, Austria	1988-2001	24%
Madrid, Spain	1987	15%
Paris, France	1975	33%
Stockholm, Sweden	1973	25%
Hamburg, Germany	1967	19%

A variety of different models have been employed to estimate the impact on transit ridership in response to fare integration or a change in fare policy. Direct elasticities between the number of trips demanded and the price of a trip are commonly used, including log-arc elasticity (most common), midpoint arc elasticity, and shrinkage ratio . However, Chin et al. argued that simple elasticities are insufficient predictors of transit ridership demand. A variety of different models have been developed, including some which account for congestion and can be effectively used to predict ridership changes under introduction of complex fare policies (as enabled by smart card technologies). Chin et al. used a congested network model to evaluate the effectiveness of a distance-based fare policy for use by the Toronto Transit Commission. They concluded that a distance-based fare policy may be Pareto-improving, and called for more sophisticated fare pricing in Toronto (such as distance-based or zone-based pricing).

Toronto Case Study

As of 2018, Toronto and surrounding municipalities signed into a number of fare integration agreements, leading to discounted transfers from the Go System ( commuter rail) and TTC (Toronto subway) and free transfers between key municipal operators outside Toronto. This was largely facilitated via the use of Presto Cards, a payment card that works across numerous transit agencies Ontario.

Fares Based on Ability to Pay

The SFMTA is currently conducting a study on developing a fare system that takes into account passengers' ability to pay, rather than simply on their ages. The SFMTA does have a Lifeline pass program, which provides a 50 percent discount on the monthly pass for residents whose incomes are below 200% of the federal poverty level. However, fewer than 20,000 people use the Lifeline system, since it is burdensome and requires a lot of paperwork for all parties. The proposed fare system would ideally cut down on red tape and provide discounts for those in financial need.

Fare-Free Transit

Cities provide a variety of services, such as parks and libraries, to everyone with no direct fee. Proponents of fare-free transit argue that public transportation should be provided in the same way. Fare-free transit would be beneficial to low-income riders, especially to people of color who are more likely to be stopped for farebeating. Fare-free transit is also seen by supporters as a way to reduce dwell times, lower administrative costs, and grow transit ridership. Opponents of of fare-free transit argue that the lost revenue, when coupled with additional demand, would stretch agency resources too thin and harm service quality. There are also concerns about loitering and vandalism, though the extent to which this is a serious problem is a matter of debate.

The practicality of fare-free transit seems to be tied in part to the size of the system. There are multiple possible reasons for this, but farebox recovery ratios play a role. Large transit systems like those in New York City or the San Francisco Bay can have farebox recovery ratios of more than 40%, meaning that switching to fare-free service would represent a huge loss in revenue. On the other hand, for small systems that number might be less than 10%. Given the cost of collecting fares (fareboxes, payment processing systems, increased dwell time), it's possible that moving fare-free could actually improve system finances. Successful fare-free system are typically in small areas dominated by either universities or resorts.

Fare-Free Case Studies

United States

• Corvallis Transit System - CTS serves a Corvallis, OR, a city of 55,000 people (including 20,000 Oregon State University students). In 2011 CTS made the decision to go fare-free as a way to reduce car dependency. Funding, which had previous come from fares and student fees at OSU, was replaced with a $2.75 a month charge to Corvallis Utility customers. The program has been seen as a success; ridership grew nearly 38% in the first year and schedule performance improved. The program is relatively new, but seems to be performing well.
• Breckenridge Free Ride - Breckenridge, CO is a ski resort town with a population of just a couple thousand people, but 50,000 visitors a weekend during peak season. The city set up a fare-free transit system to ease tourist congestion and help residents get around. Free Ride had 670,000 riders in 2009. Operational expenses come out of the town's general fund. This has worked so far but is susceptible to economic downtown, so the town is looking for new funding mechanisms. Ridership is steadily growing, and strict anti-loitering rules keep the buses moving smoothly.
• Link Transit - Washington State's Link Transit is a larger rural system serving 105,000 people over and area of 3,500 miles. It currently operates 55 buses and 22 paratransit vehicles with a budget of $11 million per year. It was established in 1989 and had no problems operating fare-free for the next decade. However, in 1999 voters eliminated the motor vehicle excise tax that had provided Link Transit with most of its funding. The agency lost 45% of its operating revenue and was forced to charge fares. The conservative area had never fully embraced the fare-free system. The current fares account for 6% of operating expenses and disproportionately effect minorities and the elderly.
• San Francisco Municipal Railway - In 2008, San Francisco Muni conducted a study on the cost-effectiveness of a fare-free system. The study concluded that Muni would see increased operating expenses and capital investments, even though the costs of fare collection would be eliminated. Muni would need an additional $184 million a year for operations, as well as an additional $519 million to procure the vehicles, facilities, and infrastructure needed to accommodate the ridership increase. The city abandoned its fare-free plan after seeing the results of the study.
• Kansas City - In 2019, city officials announced that bus service will be free starting in 2020. The City Council has required that the City government make up the $9 million estimated will be lost due to the elimination of fares.

Globally

• Tallinn, Estonia - Tallinn eliminated all fares for transit taken by registered city residents in 2013. Although this fee elimination did not significantly impact congestion, research suggests that mobility may have particularly improved for lower-income residents (measured in terms of the number of trips), although not necessarily leading to greater access to employment. There is some evidence that the introduction of fare-free transit caused a reduction in average trip length (of roughly 10%), which could suggest that riders are replacing trips previously made by walking or biking with transit.
• Luxembourg - The nation of Luxembourg will make all public transit free starting as of March, 2020. Fares currently represent a small part of the overall operating costs of the system, totaling 41 million Euros, or less than 10% of the 491 million Euro operating costs. Although the nation does expect some benefits with respect to reduced congestion and emissions, the Minister for Mobility and Public Works, François Bausch, has said that the initiative, "is primarily a social measure...the objective is to stop the deepening gap between rich and poor. For people on low wages, transport expenses matter. Therefore it is easier to make it free for everyone."

Additional Reading

Cervero, Robert. "Flat versus differentiated pricing: What's a fair fare?" 1981.

Cervero explores the efficiency and equity of different pricing structure by comparing transit fares and the cost to provide service. He finds that flat fare structures generally result in short-distance, off-peak riders subsidizing long-distance, peak hour customers. A subscription is required to access this article.

Transit Cooperative Research Program. "Fare Policies, Structures, and Technologies: Update." 2003.

The Federal Transit Administration commissioned this report to identify and evaluate different approaches to fare policy, structure, and collection technologies, with special consideration given to the customer benefits and challenges and equity concerns of each approach.

Transit Cooperative Research Program. "Transit Pricing and Fares: Traveler Response to Transportation System Changes." 2004.

This document summarizes literature on ridership changes in response to different fare adjustments, including the introduction of variable fares and differentiating peak and off-peak fares. Few studies explore the relationship between transitioning to differential pricing and ridership levels.