To address the twin challenges of global warming and the negative impacts of volatile oil prices, we need to leverage all potential policy tools at our disposal. Subsidy for public transport can be one of the most efficient among them. An analysis of economics of public transport and its comparison with private transport justifies the feasibility of such subsidy.
Public policies and regulation are all about finding the right leverages with which people can be incentivized into behavior that will optimize the overall welfare of the society. Before the industrial revolution made our life dependent upon market forces, the job of the rulers was relatively straight forward and generally restricted to maintaining national defense and law and order to prevent crimes. However, with the advent of modern markets, and with market driven economies driving our day to day life, regulation has become a complex affair.
Some of the best illustrations to the complexities of modern life are the problems like climate change that threaten us with dire consequences. To tackle them effectively, one needs to have a comprehensive understanding of all contributing factors, in particular the economic behavior that leads to their origin and expansion. This needs to be followed with an analysis of options that help address them, how such interventions may impact the overall society and economy, and determine the most efficient ones, along with their costs and benefits, intended as well as unintended.
While the activists keep fretting about the lack of political consensus regarding commitments to curtail carbon emissions and thereby address global warming and related environmental problems, few actually go further and look into all related issues and options comprehensively. This is a problem that is very closely intertwined with at least two more issues that affect all economies and societies, though not necessarily with the same intensity.
The first of them is the problem of volatile prices of fossil fuels, which have frequently rattled economies across the world.
We have major fluctuations over the last few decades, and a steadily rising global demand which suggests a long term upward price trend. Though this price rise was interrupted by last financial crisis and the shale gas revolution, it is again on the upswing and the results are threatening for all economies that rely primarily on oil imports.
The second related issue is that of transportations costs in the economy. These costs are not exactly in the nature of consumption, but mostly constitute transaction costs that do not lead to any production on its own. In other words, these are costs that must always be the primary target for reduction by policy measures and regulation. Transportation costs include private transport as well as public transport. While private transport costs are borne by those who can afford it, they are nevertheless costs to the society, and even though they may be borne voluntarily by ones capable of affording them, their reduction is an unquestionable policy objective.
Public transport is a substitute to private transport. Economically, it has several advantages over private transport. The first of them is the cost. Per capital cost in public transport is usually only a fraction of private transport. However, its benefits extend to the society even further as reduced congestion of roads, which is a constant problem in all metropolitans across the world, and which in turn can itself lead to massive saving of fuels and costs.
One may ask the question as to why the state should take it upon itself to reduce these costs, and not leave them to the individuals. The answer to that lies in the fact that an individual has control over means of private transport, but not public transport, hence interventions that will bring improvements in the public transport need to be initiated at a different level. But then, one can still argue in favor of leaving the public transport to pure market forces. This is where one needs to comprehensively examine the economics of private and public transport.
Private transport generally relies upon fossil fuel guzzling vehicles that also need a lot of road space. Urban land is a precious commodity, and road congestion a consistent occurring in most metropolitans. Private agents can afford to buy vehicles and fuel, but that does not take care of scarce road space, congestions and negative externalities of carbon emission. The only feasible way in which these externalities can be embedded in price is by a carbon tax on the lines of sin tax applicable on smoking, but that will make transport costs rise and can impact the overall economy.
On the other hand, while public transport is often run by private agencies, they cannot price the cost of maintaining optimal roads into transportation price. Even if they do so, they would not be able to include the benefits of reducing carbon emission. This is why leaving public transport completely to market forces will also not be efficient.
Thus, comparing the economic consequences of private transport with those of public transport, one can see that public transport reduces both transaction costs as well as the negative externalities associated with private transport. The benefits of reduced costs can be very important for economies relying on imports of fossil fuel, and the benefits of reduced volatility of global prices can be even greater.
Unfortunately, these social benefits of public transport do not get included in the prices and hence need to be included through policy measures by the state.
This is where government subsidies for public transportation acquire both sufficient justification and a great significance as a tool for optimizing the balance between public and private transport. This balance is crucial since neither private transport alone, nor public transport by itself can cater to all the needs of people. An optimal balance would be one that allows most of the people in the overlapping zone of relative indifference between private and public transport to prefer public over private transport.
Financial subsidies are the most potent tool to achieve this, though additional measures like improvement of quality, expansion of public transport reach and the last mile connectivity may also be required. A simultaneous carbon tax on private transport can finance it and make the whole exercise largely revenue neutral.
A shift of masses from private to public transport can mean massive reduction of fossil fuel consumption in private vehicles. In addition, it can address the challenges of road congestion, air pollution and road accidents. For oil deficient economies, it can facilitate a more balanced trade account, and the overall impact of such measures can reduce speculation and volatility in crude prices.
The case for subsidizing public transportation along with a carbon tax on private transport is simply too strong to ignore!
Unlike law, where extreme emphasis is placed on defining a word for the purpose of a given statute, words are often used somewhat loosely in other faculties, including economics. This is one of the reasons why many experts tend to use words like value, price and cost somewhat interchangeably, as if they relate to the same thing.
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