Analyzing the Economic Impacts of Public Transport Subsidies

This essay delves into the economic implications of public transport subsidies, exploring the ongoing debate regarding their necessity and effectiveness. It examines the arguments for subsidization, highlighting the external benefits such as reduced costs for providers and increased demand due to lower fares, potentially benefiting low-income populations and contributing to economic development. Conversely, the essay presents arguments against subsidies, including the potential for moral hazard, inefficiency, and the possibility that subsidies may not always translate into lower fares or reduced CO2 emissions. The analysis uses the Spatial Computable General Equilibrium model to assess the eco-friendly and financial effects of public transport subsidy policies. The conclusion emphasizes the importance of aligning subsidy objectives with specific policy instruments, such as fare subsidies for encouraging public transport use or road expansion for CO2 emission control, and suggests that strategic objectives of subsidy policy must be determined by linking confined situations.

Running head: QUESTION 0
LOGISTICS AND SUPPLY CHAIN MANAGEMENT
FEBRUARY 12, 2020
STUDENT DETAILS:

QUESTION 1
The public transport has significant role in the environment. There is long history of
transport subsidy in the discussion of transport economic side. The public transportation has
taken enhancing importance in urban domestic routine. The government provides various ways
of subsidies related to transportation everywhere in the world. It is a topic of debate that whether
the government should subsidize public transportation or not. A main objective of public
transport subsidy approaches is to render transit service to people. The Spatial Computable
General Equilibrium model examines eco-friendly as well as financial effect of public
transportation subsidy policy. The Spatial Computable General Equilibrium model involves
companies, clients, as well as traffic module in one context (Small, 2019).
There are several reasons to subsidise public transportation. It can see that the public
transportation makes different external advantages (Ubbels, et. al, 2017). There are some strong
cases to subsidise non-private means of transport, for example buses as well as trains. The main
benefit of the subsidy on the transport is that it decreases cost of supply to providers. It is helpful
in reducing the charges of public transportation. The subsidized public transportation will
increase the demand. In other terms, it will encourage the people to utilise this type of
transportation. The enhanced demand is a joined outcome of the income as well as replacement
impact. The substitutes to the public transport seem very expensive at the low price (substitution
effect). In addition, supposing income remains constant, the cheap public transport can be
resulted into rise in real incomes (income effect). Further the subsidized public transportation
help the poor people. It is in the best interest of poor people. In this way, it has great contribution
in the economic development. In this way, from these above discussed reasons it is clear that the
government should subsidize the public transportation (Crampton, 2018).

QUESTION 2
On the other hand, there are also some reasons for which the public transportation should
not be subsidized. It can say that the subsidization of public transport can be resulted into
the moral risk. The state subsidies can be considered as the insurance against ineffective
approaches. The inadequacy increases the cost of supply. It also distracts scarce means from
effective means. For an instance, the bus organisations can do over employment. They can
operate different buses to run them at ‘half-empty’ for longer period. Obviously there is no
assurance that all of the state subsidy would be passed on to passengers in relation to the low
fare. Additionally, the income effect of low price of public transport can be weak. Without a
doubt, the increase in real income can motivate best utilisation of private transportation. On the
other hand, it can dismay the utilisation of public transportation, signifying that the public
transportation is the inferior good. Moreover, the public transportation subsidy policy does not
decrease the CO2 emission related to travel. It can say that the fare subsidy, public transport
speedup policies, as well as cash grants motivate high travel regularity amongst the people. In
this way, it intensifies whole travel related CO2 emission. It is clear that CO2 emission can be
decreased by providing subsidy in only the road development construction (Daraio, et. al, 2016).
As per the above analysis, it can be concluded that the social well-being effects, four-
dimensional effects along with environmental effects of the subsidy policy are not same. As a
result, while the government takes decision on the level along with creation of the public
transport subsidisation, then the strategic objective of subsidy policy must be determined by
linking confined situations. By matching an objective with form of subsidy and considering
fiscal budget, the proper public transportation subsidy strategy may be developed along with
suggested. For an instance, if subsidy policy objects to enhance social well-being, in that case the
public transportation speedup policy (for an example, set different bus lane and renew vehicle) is

QUESTION 3
suggested. If subsidy policy is aimed at control of CO2 emissions, then the road expansion
construction is required to be ordered. In conclusion, in a case when subsidy policy is aimed at
encouraging individuals to utilise public transportation, then the fare subsidy policy will be
proper approach.

QUESTION 4
References
Crampton, G. (2018). Subsidies to Urban Public Transport and Privatisation. In Privatisation and
the Welfare State (pp. 201-211). Routledge.
Daraio, C., Diana, M., Di Costa, F., Leporelli, C., Matteucci, G., & Nastasi, A. (2016).
Efficiency and effectiveness in the urban public transport sector: A critical review with
directions for future research. European Journal of Operational Research, 248(1), 1-20.
Small K. (2019) “Should urban transit subsidies be reduced?” American Economic Review, vol.
99, no. 3, pp. 700–724
Ubbels, B., Nijkamp, P., Verhoef, E., Potter, S., & Enoch, M. (2017). Alternative ways of
funding public transport. European Journal of Transport and Infrastructure
Research, 1(1), 73-89.