APPLIED MICRO: Fare Structure and the Demand for Public Transit; Professor Qu Tang (Jinan University (Guangzhou))

Abstract

We study fare structure design and public transit use. Leveraging a fare rise in the Beijing Subway that replaced a flat rate with one that varies by distance, time, and offers quantity discounts, we find inelastic demand, inflexible travel schedules, and no responses to discounts. The new fare structure generates welfare losses due to lower consumer surplus and higher surface road congestion that far exceed revenue gains. The new fare is less efficient than a revenue-equivalent flat rate when users are unresponsive to discounts, while fare structures featuring a peak-hour premium are worse due to externality on road congestion.

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