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This research was the first stage in developing an investment model aimed at assisting regional authorities and the NZ Transport Agency to make public transport investment decisions. The approach assumed that public transport (PT) subsidies should be invested to maximise allocative efficiency – ie in a way that ensures society gains the greatest overall net benefit from PT.

To do this, the investment model applies a second-best pricing method to estimate optimum fare and implied subsidy levels for urban public transport. The model takes into account operating costs and externalities of alternative transport modes (cars and PT), including safety and congestion effects. It also incorporates network spillover effects for existing PT users from changes in frequency. The result is an economic model that incorporates the interactions between prices, service levels and patronage for public transport (bus initially) and private car, and associated performance indicators.

The model was developed initially only for Hamilton and detailed in a separate Excel workbook that is capable of expansion to include rail and other cities. The model shows that the costs of public transport are high in Hamilton, and that plausible alternative policy responses include significantly reducing fares or cutting services, with dramatically different budgetary implications. It shows that the idea of a single optimum solution is overly simplistic.

Keywords: bus fares, funding public transport, optimal transport subsidies, passenger transport, public transport, second-best pricing, urban public transport