Transit as an Inferior Good

Original post date: November 25, 2013
Article by: Ben Douglas

Mass transit is frequently accompanied by mass-subsidization, cartelization, and monopolies. This chronic need for artificial support might be an indication of its inherent inferiority as an economically valued good or service. If consumers preferred the bus or metro over other transportation alternatives, and if it was cost-effective, users would pay for the service and it could operate on its own merits.

This is not to say that transit cannot and does not operate without subsidization. In some places, such asLima, Peru, it can and it does. Thousands of private bus companies, many of them illegal, compete over commuters—completely without subsidy. This, however, is the exception, not the rule.

As the DMC’s very own Dr. Sam Staley points out, transit is an inferior good. “The term is not intended to be pejorative,” says Staley, “it’s a technical one and characterizes an important economic relationship between income and the demand for a specific product or service. As our income increases, we consume less transit, opting for alternatives, most notably the automobile.”

Curiously, most nations or cities that institute a transit system seem to do so as part of a plan to modernize and improve transportation. In the minds of municipal planners, transit seems to go along with advances in technology, increases in wealth, and the evolution of urban civilization. This runs contrary to what we know about inferior goods. If anything, we should see a decline in transit as people become wealthier.

This is because demand for inferior goods is inversely correlated to wealth. Thus, as society becomes wealthier, a government can only maintain transit artificially, either through ever-increasing subsidies or by limiting alternatives preferred by consumers, such as the automobile.

If public transit is the way of the future, then it also should not require such extraordinary artificial support. If a business cannot acquire a sufficient amount of private investment to open, but instead depended upon a multimillion dollar World Bank loan, it is reasonable to assume that the model is not sound.

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
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