Incentive Effects of Expanding Federal Mass Transit Formula Grants

Abstract

Abstract Public subsidies to industries firms incentives to alter their behavior. When calculating the effects of such programs, previous assessments of transit subsidies have not included the effects of these incentives on the firms' output. This article reports the responses of mass transit firms to the federal transit subsidy program and changes the Transportation Equity Act for the 21st Century (TEA 21) made to that program, as predicted by a structural model of output choice. TEA 21 increases bus service in medium‐sized cities by 6‐8 percent, butincreases service in large cities by only 1‐2 percent. The formula's incentive tier is weak, and the size of the subsidy depends little on whether that output results in increased ridership. The formula could be redesigned to provide stronger incentives to lower cost and increase ridership, thus encouraging a more efficient response from transit firms. © 2001 by the Association for Public Policy Analysis and Management.

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