Benefit Spillovers and Subsidy Exporting in Inter-Regional Public Transport Provision

Abstract

This paper models inter-regional public transport provision with federal and local levels of government. Such services can in principle be operated by (i) the higher-level government, (ii) one of the local governments, or (iii) a private operator. We derive optimal pricing and capacity (frequency) rules for each ownership regime, and show how the residents of a given constituency are affected by the choice of supplier. We find that optimal supply leads to a financial deficit under centralised as well as decentralised regimes. More importantly, we show that local residents may be better off if the service is offered by the federal government or the government of a neighbouring region. This way local residents transfer at least a part of the subsidy burden to other regions, while they still do enjoy the spillover benefits from the existence of the service. More generally, the paper identifies a peculiar mechanism in the presence of scale economies: local residents may oppose decentralisation or prefer shifting the responsibility for operating and financing the loss-generating service to other regions.