The Economic Case for Rail Subsidies

One argument against government rail subsidies is that public transportation should pay for its own costs through fares. Setting aside the fact that road users don't pay their own costs either, cities should certainly strive for user-pay transit systems with high farebox recovery rates. At the same time, many benefits of rail travel come from reducing road externalities — things like pollution or safety hazards — that are harder to calculate in strict financial terms.

Recent work from a research team led by economist Rafael Lalive of the University of Lausanne, in Switzerland, addresses this grey area with a creative study of German rail subsidies. In the mid-1990s, Germany implemented a policy reform that increased competition on certain passenger rail lines, resulting in a 28 percent increase in service. Using data from 551 lines, together with data on major road externalities (e.g. car emissions and severe accidents), Lalive and colleagues analyzed the connection between better service and public benefits.