Modeling Economic Inefficiency Caused by Public Transit Subsidies

An empirical investigation into the distorting effects of subsidies on firm efficiency, this book puts together and applies recent developments in econometric methods to explore efficiency consequences of government subsidy on firm operations. Within the neoclassical framework, the book provides analytical solutions capturing the effect of subsidy on cost, output, input demand, and allocative distortions when the firm receives operating and capital subsidies. By doing so, the book avoids the ad-hoc models that have been used to estimate the effect of subsidy on firm efficiency in the transit industry.

The book takes the analytical model and develops empirical models to estimate the effect of subsidy on firm efficiency in transit firms. It applies a variety of techniques—deterministic, stochastic frontier estimation, and Data Envelopment Analysis to capture various aspects of the effect of subsidy. It separates allocative inefficiency into those due to subsidy and those due to internal factors. The book's contribution is the consistency and thoroughness with which the authors deal with the topic and the rigor of the empirical estimation.

Using the basic neoclassical model of firm behavior, the authors derive and estimate the effects of subsidy on economic efficiency in transit systems.

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Investigates why studies of suspected economic inefficiencies in subsidized public transit systems yield so many conflicting results, and suggests methods to resolve those conflicts. Finds that the relationships between costs and subsidies have been based on regression analysis of ad hoc models, and the effects of subsidies are judged by the signs of their coefficients; and that the many objectives of public transit systems have not been accounted for. Builds a theory around private, rather than total, cost minimization to show how the impact of operating and capital subsidies of a particular system can be analyzed. Annotation c. by Book News, Inc., Portland, Or.

K. OBENG is UPS Professor of Transportation at North Carolina A & T State University, where he has taught transportation and economics for 14 years.

A.H.M. GOLAM AZAM is Assistant Professor of Economics at North Carolina A & T State University and has published in various journals on subjects including transportation and international economics.

R. SAKANO is Assistant Professor of Economics at North Carolina A & T State University.