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Y
Tc
0
1
2
P
w
tY
l
L
P
v
c
1
( )
s
; (9)
K
+
=
l
L
Tc
0
Y
1
2
P
w
tY
l
L
P
v
c
1
( )
1
s
: (10)
The optimal frequency follows the square root formula (Mohring 1976; Jansson
1980, 1984). It is relevant to mention that this type of result has been extended to simple
networks by Jara-D az and Gschwender (2003b). Replacing (9) and (10) into Eq. 6, the
minimum of VRC is obtained, i.e., the cost function C
C = tc
0
Y 2
c
0
TY
P
w
2
tY
l
L
P
v
c
1
( )
s
TY
l
L
P
v
c
1
( ): (11)
From this, the total average cost AC
T
= (C/Y) is given by Eq. 12. As anticipated in the
representation of AC
T
in Fig. 1, AC
T
decreases with the number of passengers (Y).
AC
T
= tc
0
2
c
0
T
P
w
2Y
t
l
L
P
v
c
1
( )
s
T
l
L
P
v
c
1
( ): (12)
Users costs play a key role in the results represented by Eqs. 9, 10, 11, and 12 along
with their pricing implications. What if users cost were not considered? Let us now
analyze the case in which the design is commanded by a minimum cost service to carry a
given demand Y. In this case, as only the operators cost is considered in the optimization
problem, it becomes
Min
f ;K
VRC = fT tY ( ) c
0
c
1
K ( ):
subject to K _k f ( )
(13)
This yields the following expressions for the optimal values f
op
and K
op
(=k):
f
op
= Y
tc
1
l
Tc
0
L
r
; (14)
K
op
=
Tc
0
l
tc
1
L
r
: (15)
In this case the resulting frequency f
op
is proportional to the number of passengers (Y)
and vehicle size does not depend on Y. In other words, operators would adapt to demand
increases purely through frequency increases. Simulation of Eqs. 9, 10, 14, and 15 using
simplied Santiago type parameters (Appendix 1) yields the curves presented in Fig. 2.
The intuitive interpretation is that any given passenger volume can be served with different
combinations of frequency and vehicle size, but users costs would be lower for high
frequency-small vehicles combinations while operators costs are favored by low fre-
quency-large vehicles combinations, up to a limit. Optimal frequencies and bus sizes have
been obtained for other models that represent users perception in a more complete way,
for example, considering the effect of crowding on the value of in-vehicle time (Jara-D az
and Gschwender 2003a), which increases the difference between the curves.
So what is the link between the design variablesas frequency and vehicle sizeand
the cost analysis behind optimal pricing? As stated earlier, even if operators cost exhibited
Transportation (2009) 36:6575 69
1 3
constant returns to scale there are scale economies in the total costs because the average
users cost decreases with the number of passengers. As shown in Sect. 2, these scale
economies imply that a subsidy would be necessary if the pricing-relevant cost was
charged. One could choose to suppress the subsidy imposing the entire burden on the users,
which means that the money price should be equal to AC
O
. If this was the case, the
minimum fare that would actually cover cost for the operator would happen under the
operating conditions that hold when one solves problem (13). On the other hand, note that
if P
v
= P
w
= 0, then Eq. 9 becomes Eq. 14 and Eq. 10 is equivalent to Eq. 15, i.e., f* and
K* collapse into f
op
and K
op
. Intuitively, then, if the actual money price (whoever pays it)
varied between the minimum AC
O
(that makes the service feasible for a demand Y) and
0
10
20
30
40
50
60
0 2000 4000 6000 8000 10000 12000 14000
Y (pax/hr)
f
(
v
e
h
/
h
r
)
0
20
40
60
80
100
120
140
0 2000 4000 6000 8000 10000 12000 14000
Y (pax/hr)
K
(
p
a
x
/
v
e
h
)
f *
K *
f
op
K
op
Fig. 2 Optimal frequency (f*) and vehicle size (K*) as a function of the number of passengers (Y),
compared with those considering only operators cost (f
op
and K
op
)
70 Transportation (2009) 36:6575
1 3
P
*
? s
*
as dened in Sect. 2 for this demand level, we would expect f and K to move
within the area between both curves in Fig. 2. Let us explore this more rigorously.
Optimal design and cost analysis under a nancial constraint
Let us now impose a nancial constraint that restrains the operators cost to a maximum of
A, exogenously given because of, say, budgetary reasons or general policy (e.g., an
exogenously imposed fare and no subsidies). Then, if active, this constraint will induce
different optima for frequency and bus size. Let us examine this. The restricted social
optimisation problem can be written as
Min
f ;K
VRC = fT tY ( ) c
0
c
1
K ( ) P
w
1
2f
Y P
v
l
L
T t
Y
f
Y
subject to k(f ) _K
fT tY ( ) c
0
c
1
K ( ) A_0
(16)
where A represents the sum of fare revenues and a subsidy, not necessarily optimal:
A = P s ( )Y: (17)
Again, the vehicle capacity constraint will always be active, as explained earlier.
Therefore, K = k given by Eq. 7 and the problem can be rewritten as
Min
f
VRC = fT tY ( ) c
0
c
1
Y
f
l
L
P
w
1
2f
Y P
v
T t
Y
f
l
L
Y
subject to fT tY ( ) c
0
c
1
Y
f
l
L
A_0
(18)
If l is the multiplier of the nancial constraint, then the rst order condition for
frequency in problem 18 is
T c
0
c
1
Y
f
l
L
fT tY ( )c
1
Y
f
2
l
L
P
w
1
2f
2
Y P
v
t
Y
2
f
2
l
L
l T c
0
c
1
Y
f
l
L
fT tY ( )c
1
Y
f
2
l
L
= 0
(19)
From this, the frequency
~
f and bus size
~
Kresulting from problem 16 can be obtained as
~
f =
Y
Tc
0
1
2
P
w
1 l ( )
tY
l
L
P
v
1 l ( )
c
1
s
; (20)
~
K =
l
L
Tc
0
Y
1
2
P
w
1 l ( )
tY
l
L
P
v
1 l ( )
c
1
s
: (21)
Note that the optimal frequency and bus size in Eqs. 20 and 21 replicate the solutions
found in Eqs. 9 and 10 but users values of time are now divided by (1 ? l).
Now we use the following Property 1: the multiplier l increases as A diminishes (see
Appendix 2). This means that the tighter the budget, the larger is l, diminishing the role of
time values on both frequency and bus size. For l = 0 (which occurs for P ? s C AC
O
)
Eqs. 9 and 10 are recovered. For l?? (which occurs when A is set exactly at the
Transportation (2009) 36:6575 71
1 3
minimum operators cost for each Y level), Eqs. 14 and 15 are recovered. Therefore,
diminishing A moves frequencies and bus sizes from their optimal values f* and K* to f
op
and K
op
in Fig. 2 for all levels of demand.
Equations 20 and 21 help explaining explicitly the missing link between design and
nancial policies. If active, imposing a nancial constraint acts on the optimal design
diminishing frequency and increasing bus size for all levels of demand. This happens
because the constraint operates in such a way that it is equivalent to reduce the importance
of users time in the design problem, a hidden property that has now been unveiled.
Let us investigate now how the cost curves associated with
~
f and
~
K look like, going back
to the cost curves depicted in Fig. 1, where only the case of l = 0 is represented. When
l[0 (i.e., the budget constraint is active in problem Eq. 16), by denition of the problem
the total cost is no longer the minimum; it increases for all levels of demand, which raises
the AC
T
curve to AC
/
T
: On the other hand, as it is the operator cost the one that is
constrained, AC
O
diminishes for all demand levels. As AC
U
is the difference between AC
T
and AC
O
, the new average users cost curve, AC
/
U
; raises above the old one by an amount
that is larger than AC
/
T
- AC
T
. In Fig. 3 we have represented these new AC
/
T
and AC
/
U
curves, which we will now use for the new pricing analysis.
Let us begin at the socially optimum point where demand equals MgC
T
, with users
paying P
*
= MgC
T
- AC
U
, which requires a subsidy s
*
to cover operators costs. Let us
now assume that the government does not want to subsidize the service. In this case, the
users will have to cover total cost by paying a larger amount P = AC
T
- AC
U
= AC
O
,
which will happen at a demand level Y8 \Y
*
. According to Eqs. 9 and 10, also represented
in Fig. 2, at Y8 optimal frequency and vehicle size will be lower than at Y
*
. If P8 is
considered unacceptably large by the users or politically inconvenient by the government,
then an exogenous lower price P
a
\P8 can be imposed. In this case, however, operators
costs could be covered only by redesigning the service making the budget constraint active
in problem 16; as deduced above, AC
T
rises to AC
/
T
and AC
U
rises to AC
/
U
, up to a point
where P
a
= AC
/
T
AC
/
U
: This will happen at a demand level Y
a
\Y8 such that frequency
is even lower than at Y8 because of two effects: because demand diminishes along AC
T
(Eq. 9) and because total average cost increases at Y
a
reaching AC
/
T
by diminishing
frequency according to the effect of l in Eq. 20. Note that, following the same path, K
diminishes by Eq. 10 but then increases by Eq. 21; the former effect is smaller the more
inelastic the demand and the latter effect is larger the smaller P
a
.
The relation between price and the design variables becomes even more important when
one realizes that setting a price below P8 induces a fall in demand because of the rise in
AC
U
due to the newconstrainedcombination of frequency and vehicle size. This
Fig. 3 Pricing and cost analysis
under a budget constraint
72 Transportation (2009) 36:6575
1 3
makes the welfare comparison between the two non-optimal points quite interesting. Total
welfare is given by the area between demand and the total marginal cost curve, which
clearly diminishes when P8 is charged instead of P
*
, but it falls even more if the price P
a
,
smaller than P8, is exogenously imposed. And this occurs because of the reduction in
quality (frequency).
Conclusions
Imposing a nancial constraint on the operation of scheduled public transport systems acts
as if the values of waiting and in-vehicle time savings were less than the ones intended,
something that is not at all evident for a general policy maker (and even for transport
analysts and modelers). Making the users bear the whole cost of public transport provision
unambiguously diminishes frequency regarding its optimal social level and affects vehicle
size in such a way that it can increase depending on the price level and on demand elasticity.
This is a relevant result for the structural design of public transport policies, as it links
operational variables such as frequency and vehicle size with nancial policies usually
decided outside the transport eld. This helps explaining the effect that overall economic
policies may have on the operation of such an important public service, as seems to have
been the case in Santiago, Chile, where the need of a subsidy was originally dismissed
carelessly and a limit to the fare was exogenously imposed at the beginning of the Tran-
santiago plan, causing a eet reduction by some 30% with larger buses, a process that is now
being partially reversed. It would be interesting to analyze in the future the impact of non-
optimal subsidies or its absence on the shape of the bus network, something that could be
studied using the framework developed by Jara-D az and Gschwender (2003b) to compare
the relative advantages of direct services versus those with many transfers.
Acknowledgements This research was partially funded by Fondecyt, Chile, Grant 1080140, and the
Millennium Institute on Complex Engineering Systems. We would like to thank Roberto Cominetti for help
with Appendix 2.
Appendix 1
Values of the parameters used in Fig. 2
Parameter c
0
(US$/h) c
1
(US$/h) t (s) l (km) L (km) T (h) P
w
(US$/h) P
v
(US$/h)
Value 10.65 0.203 5 10 60 2.72 4.44 1.48
Appendix 2
Proof of Property 1.
Let us consider the convex optimization problem
Min
x
f x ( )
subject to g x ( ) A_0
(A1)
If k is the multiplier of the constraint, problem (A1) is equivalent to
Transportation (2009) 36:6575 73
1 3
Min
x
Max
k _0
f x ( ) k g x ( ) A ( ) [ [ (A2)
Max
k _0
Min
x
f x ( ) kg x ( ) kA [ [ (A3)
As kA does not depend on x, the internal minimization yields an optimum x
*
(k) such
that
f x
+
(k) ( ) kg x
+
(k) ( ) = p k ( ) (A4)
Then problem (A3) can be re-written as
Max
k _0
p k ( ) kA [ [ (A5)
Let k
i
be the optimal value of k for constraint level A
i
in problem (A5). Then
p(k
1
) k
1
A
1
_p(k
2
) k
2
A
1
= P(k
2
) k
2
A
2
k
2
A
2
k
2
A
1
_p(k
1
) k
1
A
2
k
2
A
2
k
2
A
1
(A6)
Taking the rst and last terms in (A6), we obtain
0 _ k
1
k
2
( ) A
1
A
2
( ) (A7)
that proves Property 1, i.e., if A decreases k increases.
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Author Biographies
Sergio Jara-D az is Professor at Universidad de Chile. Holds a PhD and MSc from MIT, where he has
taught during various terms. Author of Transport Economic Theory (Elsevier, 2007) and some 80 research
74 Transportation (2009) 36:6575
1 3
articles on transport demand (income effect, value of time, users benets, time allocation), multioutput
analysis in transport industries, public transport modeling and pricing. Resides in N