Tuesday, March 19, 2019


And how subsidies, even if to the not so poor, can make a small contribution to the public good and saving the planet.

It is tempting to assume that the pensioner bus pass, or in London the Freedom Pass, is just another item within the host of benefits, tax reliefs, grants and subsidies that make up the complex of arrangements that reflect our welfare state and public spending choices. On this interpretation, it might be viewed as a policy choice based on political priorities. According to your political persuasion and generational perspective, it is then either just another bung to an over-privileged age group who happen to turn out in greater numbers to vote, or, alternatively a redistributive measure which can be a major help to some low income households. I have to declare a personal interest as a beneficiary; but even among pass holders many will have inclined to the former rather cynical explanation, a view which will likely be shared by large numbers of millennials.

The politics matter, but a little more thought and investigation reveals some hidden dimensions for the policy that may actually be just as important. Even if the policy is of benefit mainly to wealthier pensioners, it may still add significantly to the public good.

The Energy and Environment Connection

First there is an inevitable connection with energy use and hence with policies for a low carbon economy. Road transport is a major source of CO2 emissions, so any policy that has a significant impact on traffic volumes will also have a corresponding impact on emissions. We also know that two of the biggest factors influencing a driver’s fuel use for any given journey are, first, cruising speeds, and, second, traffic congestion, particularly when it results in stop/ start movement.

Of course, CO2 emissions are not the only important factor in terms of environment and the quality of urban life. More traffic can mean poor air quality, especially due to diesel fuel, and longer journey times for drivers. But in this instance, I would argue, all the effects are moving in the same direction. Less traffic means less CO2, better air quality, and shorter travel times.

Enter Market Failures and the Search for Second Best Solutions

Market failures occur when the fairly strict conditions, under which the unfettered operation of competitive markets can be shown to lead to a “best of all possible worlds” social welfare optimum, are simply not met. They often provide classic and compelling arguments for policy interventions. In addition, it will very often be the case that, if the failures are bad enough, then other generally sensible measures, like competition policy, will also start to show serious flaws (see an earlier essay on gas for coal substitutionin Europe). The “second best”, given that the theoretical “best” is unattainable, can be hard to find.

Failure to comply with these “welfare” conditions is particularly rife in relation to monopolies, networks (as in the Braess paradox), failure to “internalise” social, health, or environmental costs caused by pollution of various kinds, and difficulties in the allocation of fixed costs into (marginal) prices. And unfortunately transport networks and road travel display these characteristics in spades.

·         Drivers do not face any penalty when they add to congestion and increase the journey times of all other drivers.

·         Fuel costs may not reflect the full environmental and health costs that their use incurs, although UK fuel taxes probably go quite a long way in this direction.

·         Most of the costs of operating a bus or rail service are fixed, at least in the sense that the (short run) marginal cost of an additional passenger is usually close to zero, but fares will still need to recover the high fixed costs.

Subsidising pensioner travel. The Bus Pass meets some sensible public policy tests

Particularly in big cities, traffic volume is the major cause congestion and hence of increased journey times, higher fuel consumption per vehicle journey made, and hence higher emissions. Subsidising pensioner travel on public transport can significantly reduce the number of vehicle journeys and hence traffic volumes. This helps address the first two bullet points above.

But, one might ask, why not make all travellers pay higher charges in the form of road pricing – which is what economists might recommend as a first best solution? The answer is first, that there is a lot of political resistance to raising travel costs for commuters travelling to work, some of whom may not have a public transport option and already pay a high percentage of their income on commuting to work. Second, introducing a road pricing scheme can be a complex and costly exercise.  In the UK, for example, it is currently confined to central London.

In the absence of effective road pricing, subsidising travel by public transport can be a useful part of a “second best” solution. Pensioners are a group more likely to switch to public transport in response to a financial incentive, partly because they will tend to be less constrained by working hours. Because the marginal cost of taking an extra passenger is mostly close to zero (the third bullet point), this discrimination between categories of traveller does not in this instance lead to any serious distortions in the use of resources.

And, finally, is it fair that only pensioners enjoy free travel? The answer is probably no, but free travel for all could also bring its own problems, influencing fundamental long term decisions on choice of where to live in relation to work, for example. And as a practical matter of public finances, the transport system does need to be paid for, at least in substantial part, by travelling passengers. Given that most of the costs are typically fixed, and that pensioners are the group most likely to revert to personal transport if faced with higher fares, there is again a pragmatic case for offering them lower fares or free travel. This is essentially the same motivation[1] that leads private rail companies to sell tickets at lower prices to groups deemed to be price sensitive, eg old people or students.


Readers are also recommended to two much more comprehensive evaluations of the benefits of these particular subsidised travel schemes.

[1] Ramsey pricing. This is a well known economics approach to recovering fixed costs in a monopoly situation. In technical terms it means allocating fixed costs in inverse proportion to the elasticity of demand. Sometimes unfair because it means that charges fall more heavily on "essential users".

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