Tuesday, July 13, 2010

Why poor people pay more to ride the bus

The Chicago Transit Authority (CTA) has a discount program for tourists and commuters. For just $5.75, a tourist can ride the bus as many times as he wants in a 24-hour period. After three rides, the pass pays for itself (each ride costs $2.25 if you pay in cash) For $14, the same deal applies, but for 72 hours. And, the longer the pass, the better the deal.

The deals are better for frequent users. For some seasoned commuters, the $86 ride-as-much-as-you-want-in-a-month pass can be paid using pre-tax dollars. And, that's a great deal.* For others who are intensive users of the transit system, there are permanent transit cards that offer a 25-cent discount on every fare. Then, transfers (hopping on the next bus in the commute) are just 25 cents. These discounts add up.

Regardless of the discount type, the only way to get discounted fares is by using some sort of prepaid transit card, yet I frequently see the poorest patrons paying by using crumpled wads of cash. At the same time, relatively well-to-do students, commuters and tourists who know what they're doing** pay with cards, assuredly getting discounts on their bus fares. How can this be? Where's the humanity?

My explanation is that the CTA is pricing based on cost.*** The people who save through the discount program are the people who ride the bus the most often. It would be a significant hassle to ride the bus if everyone (especially heavy users) paid with cash. Each stop would last twice as long (which costs the CTA directly in gas). Hence, it's a good idea to try to get people who use the bus a lot to use a fast and easy-to-swipe card. Not enough people will switch to the card for its convenience if the card were the more expensive option. Hence, the cards come with hard-to-ignore discounts.

To the guy at the front of the bus with the crumpled 1-dollar bill and the hand full of coins, this isn't much consolation, but at least it is an explanation.

* If you don't understand why this is a great deal. Imagine that you receive a weekly paycheck that would have been $86 in a no-tax world. After tax, you would get less (maybe around $60). The opportunity cost of the pre-tax $86 is what you would have to give up. So, the government program saves the seasoned commuter (in this example) $26 per month.

** Some tourists have no idea about the transit cards and how much they can save them. Also, these same tourists don't know that the bus does not make change. These tourists are also the type who have only 20-dollar bills on them. So, they end up paying much more.

*** Pricing based on cost is distinct from price discrimination, which I discussed a few posts back. Price discrimination occurs when the firm sells the same item that costs the firm the same at different prices to different consumers.

2 comments:

  1. The difference between the crumpled note payer and the swiper is more a matter of convenience to the payer. To purchase the discount cards, the rider has to have access to the place where they are purchased and has to have a certain amount of liquidity to purchase the card.

    I remember as a poor student who didn't have the $50 to purchase a frequent rider card, so I had to pay $75 a month in small payments to ride the transit.

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  2. Nice comment. I totally agree that is why we see some people sort into one group rather than another. Liquidity is a big reason why you wouldn't expect really poor individuals to have a discount card.

    Then, why offer the card? It can't be that you want to give discounts to people who cannot afford the bus. That's why I concluded in my post that heavy users get discounts. The discount induces them to go through the inconvenient process to obtain a swipe card. And, the CTA (I presume) would rather that people board quickly (with the swipe cards) than slowly. They get fewer complaints that way.

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