Making public transport free?

One of the great changes that our society has gone through in the last 20-30 years has been the development of a more efficient public service. In many cases, to produce an efficient public service, entire industries have been fully or partially privatised (such as electricity, telecommunications, education and health)

The philosophical basis of this activity is that the private sector - the "market" - is more efficient at allocating resources than a government controlled entity. The private sector, it is argued, is able to better serve the needs of the marketplace (and thus the community) by letting signals from the marketplace itself act as the way in which economic resources are allocated.

This philosophy - that the market is king and the government is somehow unable to run things properly - has been practiced for many years and has some notable successes. Many former government-run organisations have prospered under a privatised regime and, through the process of competition, have delivered better services. In both Australia and the US, for example, the deregulation of the airline industry has produced both lower costs for customers and higher profits for the airlines.

Yet despite the success stories, the basic philosophy itself has been proved wrong by a report in today's Sydney Morning Herald which examines the "true" cost of using private transport verses the "true" cost of using public transport (in Sydney). The report basically reveals that, in the transport marketplace, people make judgements based upon perception rather than cold, hard facts. In the end, it means that the marketplace is actually less efficient.

The article argues that travelling by train costs half as much per kilometre as driving a car. This cost-analysis takes into account not only the price of petrol, but also the cost of insurance, maintenance and so on. The price also takes into account similar costs for trains.

Yet when accountants and bean counters get together and analyze how much it costs government to run public transport, the figures don't seem to add up. It may cost the government, say, $10 Billion to run the rail network but only recover $8 Billion in ticket sales (These numbers are arbitrary - I don't have the actual costs at hand). For these analysts, the rail system is "unprofitable". The result could be cost cutting or even the shutting down of the rail network altogether. Subsidising the network via tax revenues would be viewed as out of the question, since it is seen to be "unfair". "User Pays" is a dominant idea, which means that those who use the service are the ones who pay for it - thus using tax revenue from the entire state of NSW - around 6.8 million people - would subsidize Sydneysiders - around 4.2 million people.

From what I understand, the current situation in NSW is that taxpayers still subisidize the loss-making CityRail.

So on the one hand NSW has a loss-making rail-based public transport division. But on the other hand, it has been shown that rail costs half as much as using private transport. What to do?

Obviously, the market-based system which has dominated government thinking over the years has been shown to be flawed. The belief that privatization and a market-based system will automatically confer greater benefits to users and taxpayers has been shown to be wrong. This is not to say that it hasn't worked in some industries... but it is saying that in many other industries a market system is actually less efficient.

One example of this that I have shown before is health spending. On average, the US spends around 15% of GDP on health - far more than the 10% of GDP spent by other western nations. The US system is very much geared towards the market determining how money is spent, while other Western nations have differing kinds of universal health care (ie: publically owned and operated hospitals). Statistics from the UN how proven time and again that basic health outcomes such as the infant mortality rate and preventable diseases are better served under a universal health care system. In the area of medical services, universal health care paid by tax revenue produces more and costs less than the market-driven model in America.

And so it seems now that public transport is a better use of resources than private transport. The question I raise in the title of this article asks whether Public transport should be free.

When it comes to things like this - I'm a pragmatist. Given a choice between higher costs paid for by direct consumers and lower costs paid for by everyone, I support the latter. It is obvious that it costs society less to have public transport, and, since public transport can't be funded directly by its users, then it should be subsidized by tax revenue.

I would actually go further than arguing for a tax subsidy for a loss-making enterprise. I am arguing that public transport should be completely free and should rely entirely upon tax revenue for its funds. This would reduce transport costs immeasurably and give Sydneysiders (as well as those few in Newcastle and Wollongong) more money to spend on other things.

CityRail would also save money by not having to sell or collect tickets.

In order to pay for this, taxes would need to be raised - but the amount of money taken via revenue would be less than the amount currently paid by Sydney commuters to travel by car.

Let me sum up my argument simply:

1. Privatization has led to increases in efficiency.
2. Some industries, however, are more efficient when still in public hands.
3. A recent study has shown that Sydney commuters who travel by car spend twice as much on transport as those who travel by Rail.
4. In the marketplace, perceived cost will always outweigh actual cost - the market will always make a decision based upon perception, even if the perception ends up costing more than the actual cost.
5. Therefore, we should make public transport in Sydney free, and fund it through tax revenue, since it will end up costing society less this way.

It makes sense.

From the Osostrian School Department

© 2006 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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