This paper describes the role of public transport and incidence of transport subsidies in Mumbai, India, where public transport is used for over 75% of all motorized trips. On average, expenditure on public transit constitutes a larger share of income for the poor than for the middle class. However, a larger fraction of transit users are middle class. In terms of incidence, the poorest 27% of the population receives only 19% of bus subsidies and 15.5% of rail subsidies. One-quarter of these households do not use rail, and 10% do not use bus, implying that they receive no transit subsidies. Improving the welfare of the poor through demand-side subsidies or cash transfer is, however, difficult. We therefore examine the optimal level of transit subsidies, based solely on distributional considerations. 1. Introduction Subsidies to public transport are common in developing countries and are often justified on the grounds that they make transport affordable, rather than on efficiency grounds. Given this justification, it is of interest to know how the benefits from transport subsidies are distributed. As previous analyses have noted [1, 2], supply-side subsidies—subsidies which make up revenue losses and thus reduce fares by a constant percent—are likely to be regressive or neutral. Although the purpose of such subsidies is not primarily to redistribute income, their incidence should be of interest to policymakers. Policymakers should also care about the level of such subsidies: if the purpose of subsidies is to make transport affordable, the optimal level of subsidy will depend on the source of funds for the subsidy, on the income elasticity of public transport, and on the welfare weights that the policymaker attaches to different income classes. We examine both issues for Mumbai, India. Mumbai has an extensive rail and bus system, and public transport is used for over 75% of all motorized trips in Greater Mumbai. Both rail and bus fares in Mumbai are subsidized: BEST, which operates public buses in Mumbai, is also an electric utility and subsidizes bus fares from electricity revenues. The Central and Western Railways (part of Indian Railways) operate rail services in suburban Mumbai. Although rail fares cover operating costs, they do not fully cover capital costs; hence, there is an implicit supply-side subsidy to rail fares in Mumbai. We analyze the incidence of these subsidies using data from a survey of households in Greater Mumbai that we conducted in the winter of 2003-2004.1 In Mumbai, as in many other cities, the middle class is more likely to use
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Baker et al. [14] describe the survey design and provide a copy of the questionnaires used.
[2]
There is also an economic efficiency argument for subsidies to public transport: if it is infeasible to charge private vehicles for the externalities they cause (e.g., congestion, accidents, and pollution), then subsidies to public transit may be justified. Transit subsidies may also be justified by the fact that the marginal cost of providing transit services is less than average cost. Parry and Small [15] calculate these subsidies for London, Los Angeles, and Washington, DC.
[3]
The survey, funded by the World Bank, was designed and supervised by Judy Baker, Rakhi Basu, Maureen Cropper, and Somik Lal.
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In Table 2, these shares, based on travel diaries, are respectively, 46% walking, 21% rail, and 15% bus.
[5]
The shares based on the travel diaries are 3.5% for bicycle, 3.2% for own car, and 8.6% for own two wheelers.
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In Table 2, “rail” refers to “rail” and “rail and bus.”
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The cost of travel by rail, per kilometer, is lower than the cost by bus, even if no monthly pass is purchased. See Cropper and Bhattacharya [5] for details.
[8]
It is assumed that the federal government funds a portion of the transit subsidy.
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Note that this implies and .
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The income data in Annez et al. [10] are more detailed than in our survey, which reports only four income categories.
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If , then a household with 2？m of income should be asked to forgo Rs. 1.41 to provide an additional rupee to a household with 1？m of income.
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This Appendix follows Dodgson and Topham [3], with simplifying assumptions.
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In other words, where is the producer price of good [= for transit].
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