Transit economics

Paul Krugman was hoping his commute to and from New York would be improved by the development of a new tunnel.  Much to his chagrin, the project was scuttled by the New Jersey governor.

Tunnel Of Idiocy

Many reports that Chris Christie is about to scuttle the second rail tunnel under the Hudson. If so, it’s arguably the worst policy decision ever made by the government of New Jersey — and that’s saying a lot.

The story seems to be that Christie wants to divert the funds to road and bridge repair; but in so doing he would (a) lose huge matching funds from the Port Authority and the Feds (b) delay indefinitely a project NJ needs desperately ASAP. He could avoid these consequences by raising gasoline taxes. But no, taxes must never be raised, no matter what the tradeoffs.

And it’s a social bad too: now is very much the time when we should be ramping up infrastructure spending, not cutting it.

In a follow up post he explains the essence of transit economics:

The usual suspects on the comment board are, inevitably, arguing that rail transit should pay for itself. The obvious response is that road transit doesn’t; why should only public transit have to self-finance, when private vehicles generally drive on free roads built and maintained out of taxes?

But in a way that misses the larger point: urban transportation is an area in which we know that market prices bear very little relationship to true social costs. Even if you ignore environmental impacts and the national security implications of oil imports, the fact is that driving in an urban area, especially in rush hour, imposes huge congestion externalities on other people. And I mean huge: Felix Salmon had a nice piece last year putting the external cost you impose on other people by driving into lower Manhattan at $160 a day...

Now, Econ 101 says that the first-best answer to these externalities is to make people pay these social costs; if we did, New Jersey Transit could charge much higher fares! But since that isn’t going to happen — at best, we may someday get a modest congestion charge — we’re into second-best territory.

And rail transit takes people off the roads, thereby yielding a large benefit that doesn’t show in NJT’s books....

I think Krugman has it right here. But I guess Christie wasn't much persuaded by him.  Oh well.

Looking on the bright side, it does bring some attention to a big and important area of environmental economics.   A good place for analysis of these issues is Resources for the Future.  An example is this report by Ian Parry and Kenneth Small, abstract below:

This paper derives intuitive and empirically useful formulas for the optimal pricing of passenger transit and for the welfare effects of adjusting current fare subsidies, for peak and off-peak urban rail and bus systems. The formulas are implemented based on a detailed estimation of parameter values for the metropolitan areas of Washington (D.C.), Los Angeles, and London. Our analysis accounts for congestion, pollution, and accident externalities from automobiles and from transit vehicles; scale economies in transit supply; costs of accessing and waiting for transit service as well as service crowding costs; and agency adjustment of transit frequency, vehicle size, and route network to induced changes in demand for passenger miles.

The results support the efficiency case for the large fare subsidies currently applied across mode, period, and city. In almost all cases, fare subsidies of 50 percent or more of operating costs are welfare improving at the margin, and this finding is robust to alternative assumptions and parameters.

I should note that RFF is a well-respected, non-partisan institution that is not especially liberal. And I gather that Ian Parry actually leans pretty conservative.

How would Tea Partiers feel about selling all the roads to private businesses that could then charge any price they wished to people who drove on them?  That would have sounded absurd a decade or two ago, and maybe it still does.  But with inexpensive GPS and cheap, fast computers, I don't see why this isn't now feasible.

Somehow me thinks people, even self-described conservatives, wouldn't like it.

Update:  Krugman went further and turned this into his headline column, with a broader theme about infrastructure investment.