Public transport subsidies versus road pricing: An empirical analysis for interregional transport in Belgium

The purpose of this paper is to investigate when subsidies for public transport are justified. We first theoretically identify the key parameters in determining the desirability of public transport subsidies. We then use a detailed numerical optimisation model, calibrated with data on interregional transport in Belgium in 2005, to empirically determine second-best level and structure of public transport fares under a number of assumptions. We compare them to the reference situation, and to the first-best solution where each transport mode is priced at marginal social costs. The results show that subsidies for public transport turn out to be optimal in most second-best situations. Moreover, free bus service turned out to be optimal in the peak period if car prices for some reason cannot be manipulated, and if a fair amount of substitution between bus and car use exists.