Chicago Booth Review Podcast Why Do Buses Run Empty?

Milena Almagro: If you make cars more expensive and you make people actually pay for the externality that they are creating, their congestion and environmental externality, people start using their cars less.

Hal Weitzman: Americans use buses and trains much less than their European counterparts. Yet while they sit in their cars, they're subsidizing buses that run mostly empty. Could the system be tweaked to make everyone better off? Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman, and today I'm talking with Chicago Booth's Milena Almagro about her research on public transit in Chicago. Is it possible to make the system more sustainable both financially and environmentally? Milena Almagro, welcome back to the Chicago Booth Review Podcast.

Milena Almagro: Thank you for having me.

Hal Weitzman: Well, we're delighted. We had such fun with you last time talking about... Well, fun. Maybe fun is not the right... Interesting discussion about racial covenants that we wanted to be back talking about public transit and your research on that. So here's my start. You are from Spain.

Milena Almagro: I am.

Hal Weitzman: I'm from the UK. America's very different. Americans love their cars, apart from New York City, which is a case apart where they do take a lot of public transport. But generally, Americans are not known for using public transport. They're known for driving. Why? Why is there this driving culture in America?

Milena Almagro: So let me give you some numbers just to highlight these striking patterns. In the US, more than 95% of passenger trips are car trips.

Hal Weitzman: More than 95%?

Milena Almagro: Yes. In Chicago, which is the city with the second-largest public transit system in the US, this is 70%. So Americans love their cars. Why? Well, there are historical reasons for that. In the 1940s and '50s and '60s, we had the construction of the highway interstate system, which the US, the American cities had some public transit before, but that dramatically changed, and then we started steering toward a society that it was more car-centric. And you have all of these infrastructure investments. On top of that, it's very easy to drive everywhere in the US. It's very hard to get by public transit.

Just to give you an example, I live in Pilsen. My car commute is 15 minutes door to door. My public transit commute is 50, five zero. And imagine doing this during the Chicago's winter. You don't want to do it. So many Americans think like me. And once you have your car, actually driving in the US is very cheap because US oil prices and gas prices are very, very cheap. So you put everything-

Hal Weitzman: Relatively. Let's not get people angry.

Milena Almagro: Yes.

Hal Weitzman: Relative to Europe, let's say.

Milena Almagro: Relative to Europe and relative even to public transit. What we find in this research is for that car, excluding parking, the commute from point A to point B, just the cost of that, even including depreciation of the vehicle, gas prices, maintenance, et cetera, et cetera, is cheaper than the average bus ticket in Chicago. So it's just very cheap, very convenient. Everybody wants to do it.

Hal Weitzman: Yeah. I mean, it's always a shock to people who come visit me in Chicago. I live here in Hyde Park on the South Side, and I can drive into downtown Chicago. Not only can I drive in very fast, but I can drive everywhere in downtown. People are always shocked because even though we're going to talk about congestion charging, there are very many cities where you just can't drive. Like Edinburgh, you can't drive into the middle of Edinburgh or Oxford or whatever, but you can in Chicago and in many American cities you can drive right downtown, which is something that seems unusual to visitors. Well, you talked about buses and something that I've observed and I know you have some data on is buses run very sparsely occupied, right?

Milena Almagro: Yes.

Hal Weitzman: There are not full buses in Chicago. Very many are almost empty. Why is that?

Milena Almagro: Well, first of all is because the city-

Hal Weitzman: I mean, apart from what you talked about. It is cheap to drive.

Milena Almagro: It's cheap to drive, and public transit is not super convenient. The CTA needs to maintain-

Hal Weitzman: The CTA is the Chicago Transit Authority.

Milena Almagro: Yes, my bad. The Chicago Transit Authority, the CTA, needs to maintain a minimum level of service. So you cannot run a bus every hour because nobody would use that. The average frequency is seven minutes.

Hal Weitzman: So that's mandated, you mean?

Milena Almagro: It's not mandated, but you cannot have a super infrequent service because nobody would use it. You would get into this death spiral in which public transit completely dies. So you need to maintain that-

Hal Weitzman: The frequency, sure. So it's convenient.

Milena Almagro: Some frequency. Exactly. Two facts: people tend to use their cars. Only 13% of trips in Chicago are bus trips, which is very striking if you compare that to other European cities, for example. And there is kind of a minimum or the frequency of buses are... Seven minutes is not that bad on average. I mean, I'm not saying that this is... Sometimes I'm sure you've waited for your bus longer than that. But then if you put the two things together, what we see in the data is that the median bus at every hour of the day, because of course capacity utilization changes, whether it's peak hour, off-peak, et cetera, et cetera.

The median bus runs below 20% of its capacity, which means that the median bus on average has 10 passengers in it. You have to get to peak hours. I think in the data we only see that you have to be above the 90th percentile of utilization rate of a bus to become full. If you order all buses and you take the 90th percentile bus, the bus that is fullest in the order to the 95 position, that bus is full. But below that, not even during peak hours, we are seeing that buses are full.

Hal Weitzman: And you're talking about Chicago there.

Milena Almagro: This is Chicago.

Hal Weitzman: But this is true across the US, right?

Milena Almagro: I think it's going to be even more problematic across the US with the exception of New York.

Hal Weitzman: Right. So New York is a case apart, as we say, because people use the train, they use the bus much more than they drive typically. What that means for those of us who are not on those buses is that we are subsidizing the buses pretty heavily, right?

Milena Almagro: Yeah. So on average, the cost of buses is roughly $200 per hour. Most of it is actually labor cost of the driver more than fuel cost. So you have something that is $200 per hour, very few people using it every hour. You put those two things together, and the average cost per passenger is very large. What is the fare in Chicago? At the time of our research, it was like 225, the basic fare. Then you have discounted fares. Does the fare cover the average cost per passenger? What we find is that the only time of the day in which the CTA is breaking even is during peak hours. And the subsidy, meaning the cost that the CTA pays on top of the fare, can reach up to $12 per person. So on average, we find that the subsidy is 50% of the total cost. Total cost per passenger is in between 4 or $5. You're paying $2 with your fare. So that's kind of what we find, which is a lot.

Hal Weitzman: Yeah, I mean we would want to subsidize buses, but maybe not to that... We want them to be more sustainable and want them to be able to generate revenue.

Milena Almagro: I mean, the question is if we had a transportation authority that was doing amazingly from a financial point of view, I agree that you want to subsidize public transit, and this is one of the results that we find. But at the same time, when you're in a financial crisis, you cannot keep these levels of service that you want to keep because of political reasons or because of distributional concerns, and keep low first. You cannot do both at the same time.

Hal Weitzman: So your project in this research is to take this fact about the buses and not being occupied, take the fact about people driving a lot and put them together and try and work out how do we think of this as a whole system and make it work. So just tell us a little bit about what is the animating question?

Milena Almagro: Yes. So when we started this research, we started with these two facts that we just covered. Buses are running almost empty. So it seems that, from a cost-efficient point of view, doesn't seem the right thing to do. And cars are very cheap for the person using the car, but they're very bad for society because you create congestion and you generate environmental externalities. And because we don't internalize those externalities when we are driving the car, then the question that we had in mind was, okay, given that the policy tools that a transportation authority can use, how can we improve the current transportation system that we have? Given the tools that we have without investing into a new highway or without restricting driving, which is something that many cities do, or without constructing a new subway line, which takes a lot of time in the US. With the system that we have, how can we improve the status quo, and what we see today?

Hal Weitzman: Which is fascinating because you're right. When people think of improving public transit or improving transport generally, they typically think of better infrastructure. And you're saying leave the infrastructure as it is.

Milena Almagro: No, you can do that, but that's going to take longer to materialize, especially in the US.

Hal Weitzman: Are you sure?

Milena Almagro: Yeah.

Hal Weitzman: Let's not make that our first, I guess that's what I meant. So, as you say, the other fact apart from the way that people use the system is that the Chicago Transit Authority is constantly strapped for money. So you wanted to optimize this system. Imagine that you were playing god, so central planners, they call it in economics. So when you play God, what do you do with the transport system, and what effect does it have?

Milena Almagro: So we play God in three different ways. So the first way is, okay, let's assume that we are the CTA and let's assume we can change fares, and we can change the frequency of buses and trains with the budget that we have. When we run that scenario, what we find is that you want to increase frequencies to make public transit more frequent. Why? Because that's going to drive more people into public transit. Driving more people into public transit, we find that if you do that enough, this is going to decrease the cost per passenger, the average cost per passenger. But of course, if you increase frequencies, you need more money. So you also need to increase fares to stay on budget, basically.

Hal Weitzman: So increase bus fares and increase bus frequencies.

Milena Almagro: And trains, both.

Hal Weitzman: Okay.

Milena Almagro: Yes. You want to increase both to stay on budget because if you increase frequency, you have to pay more. If you don't increase fares, then you wouldn't be able to stay on budget. So you have to do both at the same time. And when we do that, we get very small welfare effects, meaning that what the CTA is doing with their budget is not that far off from what's optimal given those constraints that we can only change... The price of cars is being fixed; we cannot do congestion charges, and the budget is fixed. The second scenario that we analyze is what if Chicago introduce some congestion taxes? And what we find is that roughly you want to double the price per kilometer. Just to give you a sense of the magnitude, this would amount to $15 for total charges for the daily average commuter. To give you a sense, the congestion tax now in New York is $9. In London now is $18. I think they changed it recently. $18, 18 pounds.

Hal Weitzman: Pounds.

Milena Almagro: Yes. So it was $15 before, and they revised it to 18. So it's in the ballpark of the numbers that other cities are implementing. So when we do that, we get much larger welfare gains. Why? Because if you make cars more expensive and you make people actually pay for the externality that they are creating, their congestion and environmental externality, people start using their cars less. You disincentivize people to use their cars, you incentivize people to stay home, and you incentivize people to use public transit, which is better for the environment and congestion. Now, on top of that, you have two things that... This is overall welfare. You get a welfare gains of the order of $6.5 million, if I recall correctly. But what's happening is that consumers are hurt. Why? Because you have to pay double for traveling by car.

And in Chicago, 70% of people travel by car. So you're making 70% of people pay twice as much as before. And it's not only that consumers are hurt, it's actually regressive. Low-income people are hurt more than high-income people. Why welfare goes up so much? Because not only you're reducing congestion and you're reducing environmental externalities, you're also collecting a lot of tax revenue that we actually put as part of being the objective of the government. And you collect the order of $30 million of tax revenue with congestion taxes. And even if you give this back to consumers, consumers are paying twice as much. You can tell them, okay, you pay a tax, but I'll rebate back some of this tax to you, and you can buy groceries with this or whatever you want to buy. Even if we do that, consumers are not going to be better off.

So if we put everything together, this tells us one reason of why congestion taxes are so hard to implement. First of all, we find that they're regressive. Second, they hurt consumers. So politically are very unpopular. And that's why we think congestion taxes, even though is the recipe that any economist will tell you when you have externalities, put a tax on who's generating that externality. You don't see it being implemented in many, many cities around the world because I think politically it's very hard.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out. It's called Entitled, and it's about human rights. Co-hosted by lawyers and law professors, Claudia Flores and Tom Ginsburg, Entitled explores the stories around why rights matter and what's the matter with rights. Milena Almagro, in the first half, we talked about your research on public transport, and you were just explaining to us about if you could play God that you had two scenarios: we could increase bus fares and increase bus frequencies, or we could put on a congestion charge, which is a hard thing to do. But there's another option.

Milena Almagro: Yes.

Hal Weitzman: So tell us about that third option.

Milena Almagro: Yes. So in the paper, the last thing that we explore is what if we try to do these two things together? Congestion taxes hurt consumers, are very good for welfare because you reduce externalities, you collect a lot of tax revenue that you can use for something else. If we only tweak public transit because we are budget constrained, it seems that we cannot do much. So if we put the two together, can we get more than the sum of the two parts or the sum of its part? It's like the overall-

Hal Weitzman: In terms of the welfare.

Milena Almagro: In terms of welfare. And the answer is yes. And it turns out that these two policies, if you put them together, they show a lot of complementarities. Why? In the congestion charge scenario, you're collecting all of this tax revenue. In the other scenario, you are budget constrained. So if we put these two things together, one thing that we can do is: what if we take all of this tax revenue and we give it back to the CTA? And actually, the idea of relaxing the budget constraint of the CTA with revenue from congestion taxes is that world is the world that gives you the largest welfare. And it's not only that gives you the largest welfare. It gives you more than the sum of the two, but you can also make consumers better off, which is something that you couldn't do with congestion charges alone.

Why? Because now you have a lot of revenue from congestion taxes. You're putting some of it back into public transit, which is going to benefit consumers. But you still have money left that even though drivers are still paying a congestion charge that is more or less going to double the cost of driving; you can still rebate that money back to consumers and compensate them for those taxes that they are paying. So if you put everything together, not only you get the largest welfare gains, but you can also make consumers and drivers and commuters better off. So that's kind of the main takeaway of the paper.

Hal Weitzman: Okay. Just to understand, you would put in place this $15 a day to drive beyond a certain limit into the city of Chicago. Is that how it would work?

Milena Almagro: It's like per-kilometer tax, what we do.

Hal Weitzman: Per-kilometer tax. I see. Okay.

Milena Almagro: Yeah.

Hal Weitzman: So it would tax you based on how far you drive?

Milena Almagro: Correct. We also played with-

Hal Weitzman: I'm remembering you were playing God, so we can do whatever we want.

Milena Almagro: Yes, exactly. So we also played with a cordon tax to simulate what they do in London and in New York. And you get, if I remember correctly, one-third of the way. So if you do the optimal cordon tax in The Loop, you get one-third of the way. Why? Because The Loop is a place with a lot of cars. So just putting some cordon tax there gets you one-third of the way, but not everywhere.

Hal Weitzman: But your tax is just on driving.

Milena Almagro: Yes.

Hal Weitzman: So the tax on driving would work out to about $15 a day.

Milena Almagro: Correct.

Hal Weitzman: And you're saying that some of that would go to the Chicago Transit Authority and the rest would go back to taxpayers in some other way?

Milena Almagro: Correct. And actually, you might think that this is a big-

Hal Weitzman: It would have to be in a way that doesn't make it easier to drive. You wouldn't be able to reduce gas taxes, for example; that would destroy the whole purpose.

Milena Almagro: Yeah, exactly. Actually, the congestion tax that we're thinking the best way to implement it is with a tax on gasoline.

Hal Weitzman: On gasoline. Right.

Milena Almagro: Because our tax is a tax per kilometer, so that would be the easiest way of implementing it. But you could be, I don't know, give it back to consumers in tax refunds or some other... We're playing God, so we can do whatever we want.

Hal Weitzman: Absolutely. Yeah, right. I mean, I guess we're really playing God. We really can do whatever we want, and we could just stop people driving completely. I'm just wondering, you talked about the politics of this. Obviously, everyone hates taxes, even if you call them charges or whatever, fees. Everyone hates that, and we are in a heavy driving culture. I'm just wondering, did you try a more moderate fee, like $5?

Milena Almagro: Yeah, we tried. We can easily do that. We've never done it because our... The premise of the paper was like, let's try to find what's optimal, given different instruments, but we can definitely do that.

Hal Weitzman: Okay. I'm just wondering if it was something that was more politically palatable, but I'm also wondering that the CTA is not exactly a profitable organization. So we are subsidizing public transport anyway, so all of us who are taxpayers have an incentive to make it work better, more efficiently. I'm just wondering, do you think that could somehow push the debate along that where is the money going to come from? Well, it can only come from other areas of transport like introducing a congestion charge.

Milena Almagro: Exactly. And actually that's a perfect segue for what I wanted to say, which is that you think that this combined policy, we're playing God, maybe this is very unrealistic, but this is actually what's being implemented in London and in New York. Some revenue that is coming from congestion taxes actually being invested into public transit. Then the next thing is, is the city of Chicago willing to entertain the discussion of should we have some form of congestion taxes? I think it's going to be very hard. I tried to talk to several people at the CTA. I tried to reach out the office of the mayor. I tried to talk to people in the Department of Transportation of Illinois. I think it's going to be a very long way until we see congestion charges in Chicago. I think Chicago is a very car-centric city. There's going to be a lot of political opposition.

However, it's funny because we see some form of congestion tax in Chicago, which is on Ubers and Lyft. There was a policy that was introduced in 2020 where if you were driving to or from The Loop, you have to pay extra. Now that has been extended to an even bigger area. The premise of that policy was to actually reduce congestion. From the numbers that I know, less than 4% of trips in Chicago are ride-hailing trips, so they don't contribute to congestion a lot.

Hal Weitzman: So it's easier to tax Uber than is to tax private drivers.

Milena Almagro: Exactly. Politically, it's easier not only because... Taxes are not included in this policy, but the people who use Uber and Lyft tend to be higher-income people. Politically, it's more attractive to implement that type of policy. My hope is that at some point I can talk to somebody in the office of the mayor or the Department of Transportation and try to tell them, "Listen, we are leaving a lot of money on the table by not doing this. You could make the CTA, the DL, and buses in Chicago; you could create a very good transportation system. We can try to converge to this European equilibrium of transportation in which everybody uses public transportation rather than their cars." Chicago has good infrastructure to get there, but still I think we're very far.

Hal Weitzman: Okay. So if the mayor's office is listening, they should contact you. Okay, excellent. Milena Almagro, thank you so much for coming back on the Chicago Booth Review Podcast.

Milena Almagro: Thank you. That was fun.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website, chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.