NY Transit Should Consider Market Pricing for Fares

The New York Metropolitan Transportation Authority is facing an $800 million gap as subsidies dry up from state and local governments and the recession dampens demand. To the fill the gap, the MTA is considering a fare increase. According to the New York Times:

“But faced with a quickly deteriorating financial situation — the budget gap has almost doubled in the past month — and with few options for additional revenue, transit planners have privately discussed the possibility of higher fares this year or a larger increase in 2011, when a 7.5 percent increase is scheduled, according to people familiar with the conversations.

“Such a move still faces significant opposition among transit officials and politicians, and officials at the authority said that raising fares this year was very unlikely. But the authority’s chairman, Jay H. Walder, may have opened a door, though a small one, at a press conference on Wednesday.

“Throughout the situation, it has been my intent to hold to that scheduled increase,” Mr. Walder said. “I believe that having regularly scheduled increases is preferable to increasing fares and tolls in other circumstances, and we’re trying very much to stay in that mode.”

To its credit, the MTA has suggested some cost reductions, including laying off ticket takers as it completes a transition to an electronic system. An even more effective way to cut costs would be to use public-private partnerships to improve efficiency and streamline operating costs, much as transit agencies in Europe, Latin America, and China have done for decades. But, this is probably too much to hope for during the present crisis.

Before raising fares across the board, however, the MTA should consider dynamic pricing of routes based on demand. As I’ve pointed out for the Washington, D.C. metro system in a previous article, across the board fares could actually be harmful, while demand-based fares could move the system toward efficiency (and higher revenues). Meanwhile, the MTA is likely losing lots of revenue by not using demand-based pricing.

In principle, demand-based pricing would increase fares along congested routes at congested times of the day to ensure uncongested travel. This is a marginal-revenue (rather than average revenue) approach to pricing and is now quite possible given the state of the art in transit fare collection. As I wrote in the Washington Post, the key is to charge the right fare for the right customer at the right time of the day to optimize transit service:

“The underlying principle is that fares should be set based on willingness to pay for most travelers. Commuters who value the convenience of traveling at peak times or using the busiest stations would be charged for doing so. Thus, no one is denied access to travel, but variable pricing asks commuters to more rigorously evaluate their options. This is the same principle that many toll roads have begun using to maintain the flow of traffic, raise revenue and spread out travel more efficiently over the course of a day.

“And by raising fares in this way, Metro can still keep costs low for targeted groups such as low-income patrons through individual subsidies as well as on important but less-traveled routes.”

This should be part of a broader initiative to move toward an enterprise-based approach to managing transit and moving away from a subsidy, naive public interest model that most transit agencies currently operate under.