RESEARCH General Government

PUBLIC TRANSPORTATION
Economist examines hurdles to privatization of urban mass transit

Mark Reutter, Business and Law Editor
(217) 333-0568; mreutter@uiuc.edu

9/1/03

CHAMPAIGN, Ill. — Free-market principles have swept through almost every form of U.S. transportation except urban mass transit, which raises the question of why privatization has not taken root there, according to a transportation expert at the University of Illinois at Urbana-Champaign.

The failure to privatize urban transit has not been through lack of trying, John F. Due, professor emeritus of economics, wrote in a working paper. Economists favoring the market school of economics have repeatedly issued calls for privatization in the name of efficiency and holding down costs. Similar calls have led to the deregulation of commercial aviation, freight railroads and trucking, as well as electric power and telephone companies that were formerly considered natural monopolies.

"But after three decades of arguments to shift to the market approach, government-owned urban transit systems remain largely intact in the U.S., even more so in continental Europe, and less so in the developing world," Due wrote. "The reasons given for this failure by the free-market schools – power of labor unions, transit managers, contractors, etc. – are not convincing, thus far at least."

More convincing are the limitations of privatized, competing transit companies. A built-in hurdle is the difficulty, owing to heavy fixed costs, of earning a profit in the transit business without resorting to price-gouging fares or reduced service.

In a regulated monopoly, bus and subway operators take responsibility for the whole system and have an incentive to coordinate schedules and services as well as maintain safety and reliability. In countries where private operations are sanctioned, safety has sometimes been compromised and transit users have fewer avenues to complain about poor service.

The market approach to transit would actually re-privatize systems that were once owned by one or more private companies, often affiliated with electric companies. Federal legislation barring electric companies from owning transit lines, along with growing competition from private automobiles, led to the bankruptcy and liquidation of many private transit lines after 1945.

Following a long period of financial crisis, the bus and rail-transit lines that survived were consolidated under city and regional government authorities.

The industry always has been hurt by the problem of "peaking," or the concentration of use during the morning and evening commuting hours. "The more severe the peaking, the more expensive it is to provide personnel and equipment without higher costs per passenger mile," Due wrote. "Peaking produces a high percentage of empty seats, which is noted by critics of the present system as evidence of inefficiency and thus the need for a free market, when actually it is an inherent problem of urban transit."

A single transit authority is better able to manage peaking and overcrowding, the Illinois economist argued, and the rise of "reverse commuting" during peak periods has led to the more efficient use of trains and buses in Chicago, New York and other transit-dependent cities.