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The effect of nancial constraints on the optimal design

of public transport services


Sergio R. Jara-D az Antonio Gschwender
Published online: 16 September 2008
Springer Science+Business Media, LLC. 2008
Abstract Recent experience with the design of bus services in Santiago, Chile, seems to
conrm Janssons (1980) assertion regarding observed planned bus frequency and size
being too low and too large, respectively. We offer an explanation based upon the relation
between cost coverage, pricing and optimal design variables. We recall that average social
cost decreases with patronage, which generates an optimal monetary fare below the
average operators cost, inducing an optimal subsidy. Then we compare optimal frequency
and bus sizethose that minimize total social costswith those that minimize operators
costs only. We show that an active constraint on operators expenses is equivalent to
diminish the value of users time in the optimal design problem. Inserting this property
back in the optimal pricing scheme, we conclude that a self-nancial constraint, if active,
always provokes an inferior solution, a smaller frequency and, under some circumstances,
larger than optimal buses.
Keyword Public transport Subsidy Optimal frequency Optimal bus size
Self-nancial constraint
By means of a simple bus line model it is possible to show that social cost mini-
misation results in a pattern of service characteristics which is radically different
from most present services, mainly in these respects: given the demand, more buses
should be run, and the buses should be much smaller. (Jansson 1980)
After more than 30 years of discussion and theoretical development, the main (and
somewhat embarrassing) question is: why is optimal bus transport pricing applied in
hardly any urban area of the world? (Jansson 2005)
S. R. Jara-D az (&) A. Gschwender
Universidad de Chile, Casilla, 228-3 Santiago, Chile
e-mail: jaradiaz@ing.uchile.cl
1 3
Transportation (2009) 36:6575
DOI 10.1007/s11116-008-9182-8
Introduction
Recent experience with the design of bus services in Santiago, Chile, seems to conrm that
Janssons (1980) assertion regarding observed planned bus frequency and size being too
low and too large, respectively, is still a problem. In this paper we offer a rigorous
explanation for this, which rests upon the relation between cost coverage, pricing and
optimal design.
At the tactical level, as dened by Van de Velde (1999), the optimal design of scheduled
public transport services includes three elements: the structure of the lines in a network, the
frequency and the vehicle size of each line. We have shown that these design variables do
depend on the way in which users costs are taken into account (Jara-D az and Gschwender
2003a). On the other hand, users costs cause an average social cost that decreases with
patronage, which in the end generates an optimal monetary fare that falls below the
average operators cost (Jansson 1984; Jara-D az and Gschwender 2005). This suggests
that the external imposition of a non-optimal fare level should have an impact on the
optimal design. In the following section a brief review of the underpinnings of socially
optimal public transport pricing is offered, highlighting the roles of both users and
operators costs. In Sect. 3 we examine the optimal design variablesfrequency and bus
sizethat underlie the cost schemes. These are obtained for two objective functions:
minimizing total social costs (users plus operators) and minimizing operators costs only. It
is shown there that in this second case frequencies are smaller and vehicles are larger than
in the rst case. In section four we link the optimal design with the nancial conditions,
showing that imposing a constraint on operators expenses when searching for the optimal
design is equivalent to a reduction of the users time value by a factor that increases with
the nancial constraint. Inserting this property back in the optimal pricing scheme, we
conclude that a nancial constraint, if active, always provokes an inferior solution, a
smaller frequency and, under some circumstances, larger than optimal buses. Section 5
concludes.
The pricing-relevant cost analysis
Two types of resources have to be taken into account in the microeconomic analysis of
public transport: those provided by the operators and those provided by the users, namely
their time. Considering the inputs supplied by the operators, there are operational and
capital costs. The former include energy, crew, maintenance, and administration, and the
latter are infrastructure and rolling stock costs. Engineering cost studies nd that, in the
absence of vehicle congestion, the average operators cost decreases with demand Y
(Meyer et al. 1965; Boyd et al. 1978; Allport 1981). Regarding the inputs supplied by the
passengers, these so-called users costs are the money values of their travel times (waiting,
access and in-vehicle). Waiting time decreases with demand Y if frequency is optimally
adapted. If the routes design can be modied, demand expansions will induce a densi-
cation of the system, yielding reductions in access time as well. In-vehicle time grows with
demand, because the more boarding and alighting the larger the cycle and travel times.
However, the effects on waiting and access times prevail, generating a decreasing average
users cost. The conclusion is that the sum of the operators and users costs yields a
total cost that grows less than proportional with the demand, as found by Boyd et al.
(1978) and Allport (1981). This means that the total average cost decreases with demand Y,
which implies that there are scale economies.
66 Transportation (2009) 36:6575
1 3
If scale economies exist, total average cost AC
T
is larger than the total marginal cost
MgC
T
. This property yields a relevant nancial result for optimal monetary fares P*. As
known, the optimal price should equal MgC
T
. However, just as in the cars optimal
congestion pricing charge, the optimal public transport fare P* should be obtained by
subtracting from MgC
T
what the users already perceive, i.e., the money value of their time
given by the average users cost AC
U
. Thus, P* should be calculated as the difference
between MgC
T
and AC
U
, dened by Jansson (1984) as the pricing-relevant cost. As shown
by Jara-D az and Gschwender (2005), the average operators cost AC
O
is larger than the
resulting fare, which induces an optimal subsidy s* to cover operators expenses. For
synthesis, and noting that AC
T
= AC
O
? AC
U
,
P
+
= MgC
T
AC
U
P
+
AC
O
= MgC
T
AC
T
\0 )s
+
= AC
T
MgC
T
(1)
This optimal priceoptimal subsidy relation is shown in Fig. 1. There, demand is a
function of generalized cost dened as the sum of the money price that passengers pay plus
the individual (average) users cost, i.e., P ? AC
U
.
To investigate the connection among costs, pricing and design, we will examine next
the technical characteristics of public transport systems that translate into the cost curves
depicted in Fig. 1.
Optimal frequency and bus size behind the cost analysis
In order to link the design variablesas frequency and vehicle sizewith the relevant cost
analysis behind optimal pricing, in this section we construct a model for the operation of a
bus service. Following Jansson (1980, 1984), let us consider an isolated corridor served by
one circular bus line of L kilometers long, operating at a frequency f with a eet of B
vehicles. This circular route is used by a total of Y passengers per hour homogeneously
distributed along the corridor, where each travels a distance l. Note that this is just a
reasonable way to describe a route with no singularities, which makes it equivalent to look
at a portion of that route, as done also by Mohring (1972). If T denotes time in motion of a
vehicle within a cycle, and t is average boarding and alighting time per passenger, then
cycle time t
c
is
t
c
= T t
Y
f
; (2)
which improves over other microeconomic models for transit operations that consider
cycle time constant, as Mohring (1976), and simplies more complex ones where the buses
Fig. 1 Optimal fare and subsidy
in public transport (Jara-D az and
Gschwender 2005)
Transportation (2009) 36:6575 67
1 3
have a probability of skipping bus stops (Mohring 1972). On the other hand, frequency is
given by the ratio between eet size and cycle time (B/t
c
), which combined with Eq. 2
yields
B = fT tY: (3)
The operator cost per bus-hour (c) can be written as a linear function of the vehicle size (K)
c = c
0
c
1
K (4)
where c
0
and c
1
are constants. There are models that consider the constant part only, as
Janssons (1980) and Mohrings (1972) original single period formulations, and other
models that include cost per kilometer instead (Oldeld and Bly 1988) that can be con-
verted into (4) through average speed. Therefore, expression (4) permits a meaningful
analytical treatment while improving on the former and encompassing the latter.
If P
w
and P
v
are the values of waiting and in-vehicle time, respectively, then the total
value of the resources consumed (VRC) per hour is
VRC = B(c
0
c
1
K) P
w
Y
2f
P
v
l
L
t
c
Y: (5)
The rst term of the right hand side of Eq. 5 corresponds to the operator expenses; the
second and third are users waiting and in-vehicle times expenses, respectively. Note that
access time is not included in VRC because route design is not a variable and, therefore,
access cost is a constant that is not relevant to optimize the service. Also, waiting time is in
general a fraction of the headway (the inverse of frequency) that depends on the way buses
and passengers arrive to the bus stop; here we are using the case of regular rates of bus and
passengers arrival. Using Eqs. 2 and 3, we can write expression (5) as a function of f:
VRC = f T tY ( )(c
0
c
1
K) P
w
1
2f
Y P
v
l
L
T
tY
f

Y: (6)
This expression shows that, ceteris paribus, increasing frequency diminishes users
costs but increases operators costs. Users cost reduction occurs because increasing fre-
quency diminishes waiting and in-vehicle times, this latter because fewer individuals board
and alight per bus.
Vehicle capacity should be enough to accommodate passengers inside each vehicle,
given by
k f ( ) =
Y
f

l
L
(7)
Then optimal frequency f* and bus size K* can be obtained by solving the following
problem:
Min
f ;K
VRC = fT tY ( ) c
0
c
1
K ( ) P
w
1
2f
Y P
v
l
L
T
tY
f

Y:
subject to k f ( ) _K
(8)
Note that the vehicle capacity constraint will always be active in this model, since the
objective function VRC does not improve when K increases (the derivative of VRC with
respect to K is positive).
Solving (8), the following expressions for f* and K* (=k*) are obtained:
68 Transportation (2009) 36:6575
1 3
f
+
=

Y
Tc
0
1
2
P
w
tY
l
L
P
v
c
1
( )

s
; (9)
K
+
=
l
L

Tc
0
Y
1
2
P
w
tY
l
L
P
v
c
1
( )

1
s
: (10)
The optimal frequency follows the square root formula (Mohring 1976; Jansson
1980, 1984). It is relevant to mention that this type of result has been extended to simple
networks by Jara-D az and Gschwender (2003b). Replacing (9) and (10) into Eq. 6, the
minimum of VRC is obtained, i.e., the cost function C
C = tc
0
Y 2

c
0
TY
P
w
2
tY
l
L
P
v
c
1
( )

s
TY
l
L
P
v
c
1
( ): (11)
From this, the total average cost AC
T
= (C/Y) is given by Eq. 12. As anticipated in the
representation of AC
T
in Fig. 1, AC
T
decreases with the number of passengers (Y).
AC
T
= tc
0
2

c
0
T
P
w
2Y
t
l
L
P
v
c
1
( )

s
T
l
L
P
v
c
1
( ): (12)
Users costs play a key role in the results represented by Eqs. 9, 10, 11, and 12 along
with their pricing implications. What if users cost were not considered? Let us now
analyze the case in which the design is commanded by a minimum cost service to carry a
given demand Y. In this case, as only the operators cost is considered in the optimization
problem, it becomes
Min
f ;K
VRC = fT tY ( ) c
0
c
1
K ( ):
subject to K _k f ( )
(13)
This yields the following expressions for the optimal values f
op
and K
op
(=k):
f
op
= Y

tc
1
l
Tc
0
L
r
; (14)
K
op
=

Tc
0
l
tc
1
L
r
: (15)
In this case the resulting frequency f
op
is proportional to the number of passengers (Y)
and vehicle size does not depend on Y. In other words, operators would adapt to demand
increases purely through frequency increases. Simulation of Eqs. 9, 10, 14, and 15 using
simplied Santiago type parameters (Appendix 1) yields the curves presented in Fig. 2.
The intuitive interpretation is that any given passenger volume can be served with different
combinations of frequency and vehicle size, but users costs would be lower for high
frequency-small vehicles combinations while operators costs are favored by low fre-
quency-large vehicles combinations, up to a limit. Optimal frequencies and bus sizes have
been obtained for other models that represent users perception in a more complete way,
for example, considering the effect of crowding on the value of in-vehicle time (Jara-D az
and Gschwender 2003a), which increases the difference between the curves.
So what is the link between the design variablesas frequency and vehicle sizeand
the cost analysis behind optimal pricing? As stated earlier, even if operators cost exhibited
Transportation (2009) 36:6575 69
1 3
constant returns to scale there are scale economies in the total costs because the average
users cost decreases with the number of passengers. As shown in Sect. 2, these scale
economies imply that a subsidy would be necessary if the pricing-relevant cost was
charged. One could choose to suppress the subsidy imposing the entire burden on the users,
which means that the money price should be equal to AC
O
. If this was the case, the
minimum fare that would actually cover cost for the operator would happen under the
operating conditions that hold when one solves problem (13). On the other hand, note that
if P
v
= P
w
= 0, then Eq. 9 becomes Eq. 14 and Eq. 10 is equivalent to Eq. 15, i.e., f* and
K* collapse into f
op
and K
op
. Intuitively, then, if the actual money price (whoever pays it)
varied between the minimum AC
O
(that makes the service feasible for a demand Y) and
0
10
20
30
40
50
60
0 2000 4000 6000 8000 10000 12000 14000
Y (pax/hr)
f

(
v
e
h
/
h
r
)
0
20
40
60
80
100
120
140
0 2000 4000 6000 8000 10000 12000 14000
Y (pax/hr)
K

(
p
a
x
/
v
e
h
)
f *
K *
f
op
K
op
Fig. 2 Optimal frequency (f*) and vehicle size (K*) as a function of the number of passengers (Y),
compared with those considering only operators cost (f
op
and K
op
)
70 Transportation (2009) 36:6575
1 3
P
*
? s
*
as dened in Sect. 2 for this demand level, we would expect f and K to move
within the area between both curves in Fig. 2. Let us explore this more rigorously.
Optimal design and cost analysis under a nancial constraint
Let us now impose a nancial constraint that restrains the operators cost to a maximum of
A, exogenously given because of, say, budgetary reasons or general policy (e.g., an
exogenously imposed fare and no subsidies). Then, if active, this constraint will induce
different optima for frequency and bus size. Let us examine this. The restricted social
optimisation problem can be written as
Min
f ;K
VRC = fT tY ( ) c
0
c
1
K ( ) P
w
1
2f
Y P
v
l
L
T t
Y
f

Y
subject to k(f ) _K
fT tY ( ) c
0
c
1
K ( ) A_0
(16)
where A represents the sum of fare revenues and a subsidy, not necessarily optimal:
A = P s ( )Y: (17)
Again, the vehicle capacity constraint will always be active, as explained earlier.
Therefore, K = k given by Eq. 7 and the problem can be rewritten as
Min
f
VRC = fT tY ( ) c
0
c
1
Y
f

l
L

P
w
1
2f
Y P
v
T t
Y
f

l
L
Y
subject to fT tY ( ) c
0
c
1
Y
f

l
L

A_0
(18)
If l is the multiplier of the nancial constraint, then the rst order condition for
frequency in problem 18 is
T c
0
c
1
Y
f

l
L

fT tY ( )c
1
Y
f
2

l
L
P
w
1
2f
2
Y P
v
t
Y
2
f
2
l
L
l T c
0
c
1
Y
f

l
L

fT tY ( )c
1
Y
f
2

l
L

= 0
(19)
From this, the frequency
~
f and bus size
~
Kresulting from problem 16 can be obtained as
~
f =

Y
Tc
0
1
2
P
w
1 l ( )
tY
l
L
P
v
1 l ( )
c
1

s
; (20)
~
K =
l
L

Tc
0
Y

1
2
P
w
1 l ( )
tY
l
L
P
v
1 l ( )
c
1

s
: (21)
Note that the optimal frequency and bus size in Eqs. 20 and 21 replicate the solutions
found in Eqs. 9 and 10 but users values of time are now divided by (1 ? l).
Now we use the following Property 1: the multiplier l increases as A diminishes (see
Appendix 2). This means that the tighter the budget, the larger is l, diminishing the role of
time values on both frequency and bus size. For l = 0 (which occurs for P ? s C AC
O
)
Eqs. 9 and 10 are recovered. For l?? (which occurs when A is set exactly at the
Transportation (2009) 36:6575 71
1 3
minimum operators cost for each Y level), Eqs. 14 and 15 are recovered. Therefore,
diminishing A moves frequencies and bus sizes from their optimal values f* and K* to f
op
and K
op
in Fig. 2 for all levels of demand.
Equations 20 and 21 help explaining explicitly the missing link between design and
nancial policies. If active, imposing a nancial constraint acts on the optimal design
diminishing frequency and increasing bus size for all levels of demand. This happens
because the constraint operates in such a way that it is equivalent to reduce the importance
of users time in the design problem, a hidden property that has now been unveiled.
Let us investigate now how the cost curves associated with
~
f and
~
K look like, going back
to the cost curves depicted in Fig. 1, where only the case of l = 0 is represented. When
l[0 (i.e., the budget constraint is active in problem Eq. 16), by denition of the problem
the total cost is no longer the minimum; it increases for all levels of demand, which raises
the AC
T
curve to AC
/
T
: On the other hand, as it is the operator cost the one that is
constrained, AC
O
diminishes for all demand levels. As AC
U
is the difference between AC
T
and AC
O
, the new average users cost curve, AC
/
U
; raises above the old one by an amount
that is larger than AC
/
T
- AC
T
. In Fig. 3 we have represented these new AC
/
T
and AC
/
U
curves, which we will now use for the new pricing analysis.
Let us begin at the socially optimum point where demand equals MgC
T
, with users
paying P
*
= MgC
T
- AC
U
, which requires a subsidy s
*
to cover operators costs. Let us
now assume that the government does not want to subsidize the service. In this case, the
users will have to cover total cost by paying a larger amount P = AC
T
- AC
U
= AC
O
,
which will happen at a demand level Y8 \Y
*
. According to Eqs. 9 and 10, also represented
in Fig. 2, at Y8 optimal frequency and vehicle size will be lower than at Y
*
. If P8 is
considered unacceptably large by the users or politically inconvenient by the government,
then an exogenous lower price P
a
\P8 can be imposed. In this case, however, operators
costs could be covered only by redesigning the service making the budget constraint active
in problem 16; as deduced above, AC
T
rises to AC
/
T
and AC
U
rises to AC
/
U
, up to a point
where P
a
= AC
/
T
AC
/
U
: This will happen at a demand level Y
a
\Y8 such that frequency
is even lower than at Y8 because of two effects: because demand diminishes along AC
T
(Eq. 9) and because total average cost increases at Y
a
reaching AC
/
T
by diminishing
frequency according to the effect of l in Eq. 20. Note that, following the same path, K
diminishes by Eq. 10 but then increases by Eq. 21; the former effect is smaller the more
inelastic the demand and the latter effect is larger the smaller P
a
.
The relation between price and the design variables becomes even more important when
one realizes that setting a price below P8 induces a fall in demand because of the rise in
AC
U
due to the newconstrainedcombination of frequency and vehicle size. This
Fig. 3 Pricing and cost analysis
under a budget constraint
72 Transportation (2009) 36:6575
1 3
makes the welfare comparison between the two non-optimal points quite interesting. Total
welfare is given by the area between demand and the total marginal cost curve, which
clearly diminishes when P8 is charged instead of P
*
, but it falls even more if the price P
a
,
smaller than P8, is exogenously imposed. And this occurs because of the reduction in
quality (frequency).
Conclusions
Imposing a nancial constraint on the operation of scheduled public transport systems acts
as if the values of waiting and in-vehicle time savings were less than the ones intended,
something that is not at all evident for a general policy maker (and even for transport
analysts and modelers). Making the users bear the whole cost of public transport provision
unambiguously diminishes frequency regarding its optimal social level and affects vehicle
size in such a way that it can increase depending on the price level and on demand elasticity.
This is a relevant result for the structural design of public transport policies, as it links
operational variables such as frequency and vehicle size with nancial policies usually
decided outside the transport eld. This helps explaining the effect that overall economic
policies may have on the operation of such an important public service, as seems to have
been the case in Santiago, Chile, where the need of a subsidy was originally dismissed
carelessly and a limit to the fare was exogenously imposed at the beginning of the Tran-
santiago plan, causing a eet reduction by some 30% with larger buses, a process that is now
being partially reversed. It would be interesting to analyze in the future the impact of non-
optimal subsidies or its absence on the shape of the bus network, something that could be
studied using the framework developed by Jara-D az and Gschwender (2003b) to compare
the relative advantages of direct services versus those with many transfers.
Acknowledgements This research was partially funded by Fondecyt, Chile, Grant 1080140, and the
Millennium Institute on Complex Engineering Systems. We would like to thank Roberto Cominetti for help
with Appendix 2.
Appendix 1
Values of the parameters used in Fig. 2
Parameter c
0
(US$/h) c
1
(US$/h) t (s) l (km) L (km) T (h) P
w
(US$/h) P
v
(US$/h)
Value 10.65 0.203 5 10 60 2.72 4.44 1.48
Appendix 2
Proof of Property 1.
Let us consider the convex optimization problem
Min
x
f x ( )
subject to g x ( ) A_0
(A1)
If k is the multiplier of the constraint, problem (A1) is equivalent to
Transportation (2009) 36:6575 73
1 3
Min
x
Max
k _0
f x ( ) k g x ( ) A ( ) [ [ (A2)
Max
k _0
Min
x
f x ( ) kg x ( ) kA [ [ (A3)
As kA does not depend on x, the internal minimization yields an optimum x
*
(k) such
that
f x
+
(k) ( ) kg x
+
(k) ( ) = p k ( ) (A4)
Then problem (A3) can be re-written as
Max
k _0
p k ( ) kA [ [ (A5)
Let k
i
be the optimal value of k for constraint level A
i
in problem (A5). Then
p(k
1
) k
1
A
1
_p(k
2
) k
2
A
1
= P(k
2
) k
2
A
2
k
2
A
2
k
2
A
1
_p(k
1
) k
1
A
2
k
2
A
2
k
2
A
1
(A6)
Taking the rst and last terms in (A6), we obtain
0 _ k
1
k
2
( ) A
1
A
2
( ) (A7)
that proves Property 1, i.e., if A decreases k increases.
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Author Biographies
Sergio Jara-D az is Professor at Universidad de Chile. Holds a PhD and MSc from MIT, where he has
taught during various terms. Author of Transport Economic Theory (Elsevier, 2007) and some 80 research
74 Transportation (2009) 36:6575
1 3
articles on transport demand (income effect, value of time, users benets, time allocation), multioutput
analysis in transport industries, public transport modeling and pricing. Resides in N

unoa, Santiago, with his


only wife. http://www.cec.uchile.cl/*dicidet/sergio.html.
Antonio Gschwender (Civil Engineer and MSc, U. de Chile; PhD, U of Wuppertal) presently assigns his
time to professional work at the public transport authority in Santiago (Chile), teaching and doing research
in public transport planning at the Universidad de Chile, and to board games, music, and being a husband.
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