Raúl Ramos, Hugo E. Silva
Fare evasion produces significant revenue losses in public transport systems. Recent research has found that low service quality and high prices are important determinants of fare evasion. However, the economic literature that studies the optimal public transport provision has overlooked the phenomenon. We develop a tractable theoretical model to investigate how fare evasion affects welfare-maximizing public transport design and pricing. We show analytically that fare evasion can create incentives to reduce public transport prices and improve service quality, putting upward pressure on its subsidization. We perform numerical simulations and sensitivity analysis to quantify the impact of these incentives on the public transport provision. These simulations confirm that the incentive to reduce fare evasion by itself can lead to an optimal design and price that requires subsidies.