Dennis Byrne recently published an opinion piece in the Trib asking why taxpayers pay half of transit’s costs (but not half of drivers’ costs), and thus saying that fare increases are in order. Here’s a really long reply.

In the course of writing this, I found that Sweden’s carbon tax amounts to $1.61 per gallon of gas — far higher than the ~$0.49 in tax per gallon levied in Chicago (ostensibly to pay for roads). And now that I look at it, I should’ve used the “free rider” term to describe positive externalities — and used the example of how non-drivers subsidize parking at supermarkets, since the store just wouldn’t exist without those other customers. Oh well. A few more edits are in [brackets].

Simply looking at the line item figures for transit and driving does not provide an adequate accounting of the costs that we, as a society, will end up paying.

All economic actions have “externalities,” which are costs or benefits that are outside the direct transaction. For instance, let’s say that I run a paper mill next door to your house, and dump the sludge into a stream that runs downhill into your yard. The noise, smell, and sludge don’t bother me [or my customers], since I profit, but they will cost you dearly.

It turns out that driving is an activity which has low internal costs (once you own a car, gas is practically the only marginal cost) and very high external costs — whereas transit has high internal costs [principally labor] but even higher external benefits. Even worse for transit, its external benefits are very widely diffused, while driving directly and obviously benefits the driver.

For example, direct proximity to transit typically improves property values much more so than access to a road; this is especially the case in downtown Chicago, and you could even say that access to railroads is what built Chicago in the first place. Yet all that property value created by the railroads largely did not accrue to the railroads — it benefited third parties. Similarly, properties in the Loop (which generate untold billions in property, sales, income, payroll, and other taxes) wouldn’t be generating nearly as much economic activity in the absence of transit; after all, that’s how half the people get there. In fact, that’s why most of America’s streetcars were built by property speculators, and why the world’s only profitable subway system (in Hong Kong) is a subsidiary of a huge property corporation.

In the past, Dennis, you’ve doubted whether downtown Chicago is an anachronism. I’ll tell you that it’s not. Even as old face-to-face standbys like the trading pits disappear, industries remain concentrated downtown due to what are called “agglomeration economies.” More than half of the region’s office space is downtown, and that proportion is actually increasing — as it is in Washington and New York City, the nation’s two other “fortress downtowns.” More importantly, offices rent for 30% more downtown, and apparently firms think it’s worth the premium. In fact, transit is the big reason behind that: three-fourths of downtown executives surveyed in 2002 cited access to transit (and, more importantly, the huge labor pool it moves) as the biggest factor in their location.

Like participation in the arts, use of parks, or attendance at public schools, transit is a public service that all of us benefit from even if we do not consume the service. In particular, transit makes the compact urban form of downtown and of many neighborhoods possible — you could not re-create a great walking neighborhood like Lakeview or Wicker Park with adequate parking for every visitor, since the parking lots would push everything out of walking distance. Without transit, and without the compact urban form that transit generates (both downtown and in the neighborhoods), Chicago really has little to recommend it over Atlanta or Indianapolis or Phoenix. I don’t even usually commute by transit, but I appreciate that the endlessly fascinating city that’s right at my doorstep is made possible by transit. In LA, where my family lives, there are also two baseball teams, an opera house, and great restaurants — but they might as well not exist, since it takes hours of hand-to-hand combat on the freeways to get to any of them. That’s not so in Chicago, thanks to transit.

On the other hand, driving is an activity that benefits pretty much only the driver while imposing considerable costs on the rest of society. Every additional car on the road costs every car behind it time, and that adds up. Surely, as a transportation reporter, you’ve heard of the Texas Transportation Institute’s annual Urban Mobility Report. Well, those guys calculate that transit in the Chicago region saves every single rush-hour driver 22 hours of traffic jams a year — that’s time worth nearly $1.6 billion a year, just in productivity savings to rush-hour drivers! (As you might know, that figure is nearly twice the RTA’s annual taxpayer subsidy.)

Others have attempted to calculate the full external costs of driving to Americans, and to the Chicago region in particular. (Cars impose higher external costs in cities than in the countryside.) A 1995 study looking just at the rather direct fiscal costs of roads to local governments found that Chicago-area governments spent one-third more on roads than they received in taxes and fees from road users. A number of studies have attempted to quantify a number of fuzzier costs to the public purse, like health care (to treat crash victims or asthma sufferers like me), securing oil supplies from the Middle East and elsewhere, and environmental degradation (half of all tailpipe emissions worldwide come from American cars). Six different studies from the 1990s — before, I might note, we had a set price for carbon dioxide [and before our recent Iraq escapade!] — estimate that each car costs society anywhere from $2,000 to $5,000 a year, over and above what the owner pays to operate it. On a per-gallon basis, those estimates range from $3 to $7 per gallon in social costs. So yes, in fact, we taxpayers do“pay half a motorist’s costs when he drives to work or goes shopping.”

So, there you go: one economic argument for why we “subsidize transit.”

Oh yeah, and NYC Transit and Metrorail cover more of their costs from the farebox because their boundaries are more tightly drawn — neither of them operate money-losing suburban buses.

posted at Knowledge Problem: Wanted: Economic Analysis of Urban Rail Transportation (five months’ belated thanks to Derek for the heads-up; a follow-on to Funding Redux‘s diss on privatization)

Privatization [of CTA] would hardly be a panacea; one of two companies hired in a privatization of the London Underground recently entered receivership, and taxpayers could be held responsible for its tremendous cost overruns. Our local “traction kings” hardly fared better: Insull made his fortune from energy, not the “L”; Yerkes profited off subterfuge and subdivisions, not the streetcars. In fact, both used securities fraud to cover the steep losses they faced on transit operations, which is why both were run out of town on the rails.

Those men faced no real competition, as their empires predated today’s heavily subsidized and regulated freeways, parking, sprawl, etc. By the end of Insull’s reign, the railroad industry had become the most regulated public utility in American history, wearing far heavier regulatory yokes than those which the cable, phone, and electric companies “toil” under these days.

This little history lesson hardly disproves that contracting out operations might reduce costs — particularly when public bureaucracies have ossified and become unresponsive to change — but do use caution before bandying about “PPP” without understanding its ramifications. One could even look back at the same Yerkes/Insull history and draw the conclusion that urban transit is a natural monopoly (thus enabling free transfers, for instance) and inherently requires local government involvement, or one might draw the conclusion that Illinois politics vis-a-vis transit have forever been poisoned by collusion and power-broking at the public’s expense.

In any case, I have it on good authority that a great many MBA-diseased minds (not least Rob Huberman, Chicago GSB ’00 and Carole Brown, Northwestern KSM ’89) are being put to work on the CTA’s problems now. This may not have quite the results that we bargained for.