Clearing Up the Free-Bus Debate

The provision of a government service, such as buses, and how to fund it, are fundamentally two different questions.

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In New York City, one of the 2025 mayoral candidates proposed fare-free bus service. This stirred up discussion with a lot of commenters pointing that people prefer more bus service to free buses. But this framing of the issue – the provision of additional bus service vs the funding of the bus service – is not correct. These are completely separate problems and should not be presented as a trade-off. 

Photo by Chris Lynch on Unsplash

Government Services

Governments provide various services. These can be as simple as public transit to more complex items like retirement programs and research grants. Some services are easy to financially value – for example, extending a subway line can be shown to generate significant income for the government and workers. Some services are harder to value like parks or art museums. The decision to provide a service is ultimately made by voters. Economists can help with ascertaining the value of these services.

In the context of buses, the question we ought to pose is whether creating the bus line service will generate sufficient value (both financial and from a welfare perspective) to cover its costs (both direct financial and indirect effects such as pollution). How many buses to run is a similar question. Thus, the opening of a bus-line is a value/welfare question.

Funding Services

A separate question is the funding of these services. Theoretically, all government revenue is fungible. The dollar of revenue collected via income taxes, tariff taxes, fees or fares, is ultimately just a dollar – where it came from should not matter. Politically (not economically), we do create regulations around what a dollar collected can be used for (for example, in New York City, the money collected from congestion fees is allocated to transit projects). But even such regulations aren’t really binding – given the same cost of providing the service, a dollar that’s earmarked for a particular spending category simply replaces a dollar from another revenue source. 

To bring back the bus example – there’s no specific reason why bus fares should be spent or should not be spent on buses, just because the revenue was raised from bus tickets.

Fares and Fees

The main purpose of fares in the public system is to manage over-use of a public good and internalize negative externalities caused by the good.¹ As we discussed congestion pricing in New York City, the main benefit of the congestion charge is the reduction in traffic and pollution, improving outcomes for the parties involved.

Fares aim to dissuade usage of a particular good. In the context of buses, by imposing a fare on a bus, we’re inherently dissuading its usage and encouraging other behavior (for example, walking, biking, taking the car or skipping the journey altogether). Some of these altered behaviors can be viewed as socially desirable – such as walking a few blocks over taking the bus, while others may be more problematic such as not traveling to a job interview due to the higher cost. Additionally, bus fares can also reduce bus overcrowding and discourage superfluous trips. 

Thinking Through No-Fare Buses

The preceding discussion is meant to illuminate how to think through the idea of ‘free buses’ through an economics lens. The trade-off between providing a bus service and how much to charge for it is not an economics-based trade-off, but rather shaped by political discourse. My aim is to unwind the framing of this trade-off and separate the conversation into the two topics – how much service to provide and how to fund the service. There are debates to be had in each of the topics with valid trade-offs in each. 

To illustrate this debate, one recent paper on Chicago found that the optimal fare for all of transit may be close to zero!

Designing Transportation

Almagro, Barbieri, Castillo, Hickok and Salz (2024) (“ABCHS”) modeled the Chicago transportation network with the aim of estimating the optimal charge for roads and public transit, as well as the amount of public transit. ABCHS took into account the fact that different prices (and travel times) for public transit and roads can alter people’s behaviors.

Undertaking several policy experiments under different assumptions, ABCHS found several very interesting results in the following 3 scenarios:

1. If we assume that the only policy tools at our disposal are that we can change public transit prices, change how often buses/trains run and that we have no spending restrictions, ABCHS found that the optimal transit price is negative!² This is driven by the fact that a transit planner would want to discourage people from using cars, due to their large negative externality, by subsidizing transit usage. Of course, ABCHS didn’t model that a negative price could be abused, thus, we could assume a lower bound of zero for the transit fares.

2. Assuming we can only change road pricing (a congestion charge) and cannot alter transit policy at all, it would be optimal to charge a fee of around 35 cents per kilometer, which would result in around a $13 per day cost for car users. Again, the reason this fee would be implemented is to deter car usage and encourage transit usage.

3. Assuming we can fully alter transit policy and road policy, it would be optimal to charge around 16 to 26 cents for public transit, while road usage would be charged at 32 cents per kilometer. Bus service would be reduced, while train service would be significantly increased. This policy would actually raise revenues from the current baseline in Chicago.

The summary of the estimates is presented below with Scenario 1 being “Transit”, Scenario 2 “Road Pricing” and Scenario 3 “Transit + Road Pricing”.

Funding vs Providing a Service

The paper by ABCHS demonstrates that ‘free-transit (or cheap transit) can be economically optimal when taking into consideration all the relevant externalities of transportation. Naturally, this does not mean that this particular policy outcome has to translate to other cities. But it is clear that there is no reason to dismiss discussions around reducing transit fares or setting them to zero. 

The positive spillovers of transit usage does suggest that using fares to raise revenues for the government is probably sub-optimal. Other methods, especially ones focusing on reducing negative externalities such as congestion, are better. Regardless, this discussion shows us that how we fund a service should often be considered separately from how much of a service we provide.

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Interesting Reads from the Week

1. Article:

   Guy Berger
   gives an update on the US labor market for June:

   This was a good jobs report, indicating a resilient and steady labor market despite policy headwinds. I don’t know how much longer that resilience can last.

2. Article:

   Erman Misirlisoy, PhD
   talks about research which shows how avoiding information can start at an early age. Using an experimental design, researchers looked into when children would choose to avoid receiving free information.

3. Article:

   Keshler Thibert
   conducts an interview with a descendent of Frederick Douglass about his work on child trafficking prevention.

1. Externalities are indirect costs or benefits that impact uninvolved parties caused by activities of another party (pollution impacting people’s health caused by factories and using your car leading to traffic congestion are examples of negative externalities; vaccinating oneself is a positive externality as it reduces the likelihood of others getting sick). Since these costs and benefits are not taken into account by private individuals when making decisions (i.e. they don’t ‘internalize’ them), some activities happen too much (pollution), while others not enough from the perspective of society.

2. The optimal policy would reduce bus frequency, but increase train frequency.