Atlantic Cities

The Economic Case for Rail Subsidies

The Economic Case for Rail Subsidies
Reuters

One argument against government rail subsidies is that public transportation should pay for its own costs through fares. Setting aside the fact that road users don't pay their own costs either, cities should certainly strive for user-pay transit systems with high farebox recovery rates. At the same time, many benefits of rail travel come from reducing road externalities — things like pollution or safety hazards — that are harder to calculate in strict financial terms.

Recent work from a research team led by economist Rafael Lalive of the University of Lausanne, in Switzerland, addresses this grey area with a creative study of German rail subsidies. In the mid-1990s, Germany implemented a policy reform that increased competition on certain passenger rail lines, resulting in a 28 percent increase in service. Using data from 551 lines, together with data on major road externalities (e.g. car emissions and severe accidents), Lalive and colleagues analyzed the connection between better service and public benefits.

What they found is that increasing rail service frequency by 10 percent reduced road accidents by 4.6 percent. Higher frequency rail service significantly cut down on certain nitrogen emissions too. The source of the savings seemed to be people who got off the roads and onto the rails: increased passenger rail service reduced car and motorcycle use by nearly 3 percent on commutes and leisure trips alike.

"These findings indicate that people indeed substitute from cars to trains if passenger service frequency increases," Lalive and colleagues wrote last week on Vox, an economic policy site. (The Vox write-up summarized research presented in a longer discussion paper from February 2012 [PDF].)

They then tried to monetize these rail benefits. They estimated the value of road collision prevention at about 1.2 billion euros (75,000 fewer crashes at 16,000 euros apiece) and priced lower nitrogen emissions at about half a billion euros. Together the road externalities eliminated by rail upgrades were worth roughly 1.75 billion euros — just about what the German government had paid in rail subsidies in the first place:

Our estimates indicate that these monetary benefits are in the same order of magnitude as the costs. While we do not have any precise figures on the additional subsidies required to finance this growth, it appears unlikely that these additional funds are much higher than the corresponding monetary benefits.

In other words, Germany recouped its public investment in rail through environmental and public health savings alone. That's before considering farebox revenue, and without even factoring in the time and money saved from reduced congestion. Simply put, the research underscores the fact that there are many ways to justify the public value of a transit project.

Writing about this research at his New York Times blog, Paul Krugman notes the "huge costs" that rush-hour drivers impose on everyone else in the city. The best response to these "huge market failures," in Krugman's mind and the minds of other economically minded experts, is to charge road fares during peak hours. But since American policy-makers have shied away from this approach, the second-best response is to build mass transit, he argues.

"[T]his is a totally obvious case for government intervention that's staring us in the face every time we hit the road," he writes.

This is the sort of economic case study that transportation officials in American cities would be wise to gather as the country moves toward an era of increased local transportation funding. As more and more costs fall to states and cities, sound justification for transit spending will become more and more important. While the findings reported by Lalive and company seem intuitive, there remain skeptics who still question the environmental benefits of transit. Solid research that not only makes these externalities clear but also puts a price on them is invaluable for the local policy debates that are certain to come.

Top image: A regional train travels along snow-covered rails near Essen in Germany. (Ina Fassbender/Reuters)

Eric Jaffe is a contributing writer to The Atlantic Cities and the author of A Curious Madness (2014) and The King's Best Highway (2010). He lives in New York. All posts »

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