Ian Savage (2004). Management objectives and the causes of mass transit deficits. Transportation Research A 38(3):181-199.
[Journal Website]  [Manuscript Version]

This research uses time-series data from 1948 to 1997 for the Chicago Transit Authority (CTA) to answer two related questions that have interested urban mass transit economists for many decades. The first concerns the objectives of management, and the second is the relative importance of various endogenous and exogenous factors in the industry's financial decline.

In current prices, the CTA earned an $84 million operating surplus in 1948 and suffers a $458 million operating deficit today. Decomposing this financial decline into its constituent parts suggests that a $399 million loss was caused by exogenous demand factors that have worked against transit in cities, and a $484 million loss was due to increased unit costs. Partly counteracting these negative effects were decisions made by the CTA to reduce bus service and raise real fares leading to positive financial effects of $182 million and $192 million respectively. Most of the increases in unit costs occurred between 1965 and 1980 when subsidies were increasing rapidly, and organized labor shared in the cash infusion.

The CTA's second major failing, after the failure to contain costs in the 1970s, has been the failure to get to grips with balancing the provision of bus service against the fall in demand. There is plenty of evidence that throughout its existence, the CTA management has found it to be politically more feasible to raise fares than reduce service levels to the extent necessary. This confirms previous theoretical and empirical work that pursuit of a service-output maximizing objective, given a fixed level of subsidy, results in lower levels of social welfare than if the agency explicitly maximized ridership or social welfare. The citizens of Chicago would be better off if service levels were reduced and the money saved was channeled into lower fares.

A postscript is also available that updates the analysis through to 2004 [12 pages, 121 kb PDF].