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VI. Full Social Costs and Benefits

Wednesday, December 21, 2011

VI. Full Social Costs and Benefits

The major reason that some modes of transportation are subsidized is that they are perceived as providing social benefits in addition to the benefits provided to passengers using these modes. These benefits can take several forms.

First, some modes of transportation can impose social costs on society as a whole, such as environmental pollution and excessive energy use. Modes which produce less pollution or use less energy may produce social benefits by diverting traffic from more polluting, less energy-efficient modes. The impact of different modes on metropolitan development patterns is also an issue.

Second, as certain modes become congested, it may be less costly to expand capacity in less-congested modes than it is to expand capacity in the modes that are already congested. Subsidies to passengers in less-congested modes can provide benefits to passengers in more-congested modes by reducing the traffic congestion they face.

Third, subsidies may produce more economically efficient use of a transportation mode. Economic theory argues that the economically efficient price, which maximizes consumer welfare, is the price that just covers the marginal costs of transportation usage. If a transportation mode has high fixed costs, but low variable costs of operation, charging a fare that covers all of the fixed costs may discourage usage to the point that the infrastructure is underused and consumer benefits are reduced.

In addition to helping to understand the rationale for subsidies, social costs and benefits may provide a better way of normalizing the magnitude of subsidies. A strong case can be made that comparing the magnitude of the subsidies to the magnitude of net social benefits, by mode, provides a better view of the relative subsidy than does normalizing by a physical measure such as passengers or passenger-miles.

We have not included analysis of the social costs and benefits of different transportation modes because of the difficulty of providing a value of these costs and benefits.