The price elasticity of demand for public transport

The cynical vote grab that was the petrol excise tax and public transport fee reduction is coming to an end. However, it has provided one piece of interesting information for us. As RNZ reported today:

A further extension of half-price public transport fares until March is being called "short-sighted" by public transport advocates...

Fares were halved in April, after Russia's invasion of Ukraine created a global energy crisis causing fuel prices to skyrocket.

The government hoped cheaper fares would encourage more people onto buses and trains - better for the planet, and for people's pockets.

A three-month survey run by Waka Kotahi, ending in August, found half-price fares moved 7 percent of journeys onto public transport, and about 3 percent of those journeys would otherwise have been made in cars.

The price elasticity of demand for a good or service is a measure of how responsive the quantity demanded is to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. It tells us whether demand is elastic (very responsive to a change in price) or inelastic (not very responsive to a change in price).

In this case, the price of public transport went down by 50 percent, and the quantity demanded increased by 7 percent. To a first approximation, that means that the price elasticity of demand for public transport is equal to [7/-50] = -0.14. That's very inelastic demand. The price halved, but public transport usage barely changed.

Why would demand for public transport be very inelastic? In my ECONS101 class, we go through some of the factors that make demand more or less elastic. They include: (1) the availability of (close) substitutes; (2) the proportion of income spent on the good; (3) the significance of price in the total cost to the consumer; (4) the definition of the market; (5) time horizons; and (6) whether a good is normal or inferior. In most cases, it is the first two factors that have the biggest impact, and that is likely the case here.

First, are there many substitutes for public transport? Passengers could take their own car, or they could use some active mode of transport (for example walking, or cycling). Are they close substitutes to public transport? All of those options are a lot more flexible than public transport. They offer door-to-door (more or less) transport, whereas the timetable and route of public transport is set and inflexible. So, they may not be very close substitutes for public transport at all.

Second, the cost of a public transport fare is not high, as a proportion of passengers' total income. I'm sure that some (maybe many) passengers spend a lot on public transport fares, but as a proportion of their income their public transport spending probably isn't large. A change in the fares probably doesn't affect disposable income by enough to affect the number of public transport trips that each passenger takes. Moreover, halving the public transport fare makes it take up even less of each passenger's income (which was the point), but that would have made demand even less elastic.

So, public transport fares are demand inelastic, because they aren't able to attract large increases in patronage when fares decrease. All of this is bad news for environmental and public transport activists, because if a halving of fares isn't going to generate a large shift in transport modes, it is hard to see that even making all public transport free would have much of an effect either. And then what options are left?