Fare pricing and reform
Most transit agencies employ largely flat fare systems, which charge the same price, regardless of time of day, distance or direction traveled, or quality of service. However, they do not reflect the actual costs of providing service, which constantly fluctuate throughout the day. Peak period operation, longer trip routes, and premium service all cost the agency more money to operate, and require more capital investments. Additionally, there is the issue of "cross-subsidization"; since flat fares do not distinguish between time, type, or distance of travel, transit users traveling shorter distances, during off-peak hours, and using non-premium services “cross-subsidize” riders on more expensive routes. There is a considerable body of research that argue in favor of flexible, differentiated fares. There are also other fare strategies that transit agencies can consider, such as using smartcard technology, eliminating fares altogether, or providing group fares or other discounts.
Differentiated fares are considered by many analysts to be more efficient, effective, and equitable. They better reflect the variable costs of transit service, encourage riders to travel when excess capacity is available, and subsidize all types of riders roughly equally. However, differentiated fares would be a radical departure from flat fares and many agencies are wary of potentially harming low-income and/or transit-dependent riders, not to mention wary of potential negative media attention. According to the American Public Transportation Association (APTA) in 2012, 23 percent of transit operators nationwide currently use distance-based pricing, and only 6 percent use time-based pricing. 
Transit agencies are understandably worried about losing riders if fares were based on distance traveled. However, distance-based fares could also attract new passengers for inexpensively priced short trips, whereas before they may have found $1.50 too much for a four block ride. Ridership gains and losses depend on many factors, and most transit agencies have not conducted market research on customer responses to fare reform; nevertheless, this suggests that there are ample opportunities to gain more information on the likely gains and losses that would accompany differentiated pricing.
Additionally, recent technology has made it much more feasible to collect differentiated fares. Automated fare media such as electronic, magnetic stripe contact cards, smart cards, and even cell phones enable differential fare collection in a way that a paper based system cannot. Because automated fare media provide the technological base for more complex fare structures, agencies should consider the possibility of adopting different pricing structures in the future when making capital investments in fareboxes and turnstiles. This may eliminate or reduce expensive barriers to implementing differential pricing.
- Los Angeles MTA Study
- In 2010, Los Angeles Metro looked at the potential for time and distance-based fares for the MTA bus and rail system.
- The time-based system would give riders a window of time during which subsequent boardings would not require payment. Transfer fees would be eliminated during that time period. A simple way to implement this would be to use the TAP cards, although the agency would have to look into additional hardware to vend receipts if it wanted to accommodate cash-paying riders as well. One important implication is this system would encourage riders to use the fastest services available, since they would be granted a narrow time window of free transfers. Base fares may have to be increased, since transfer fare revenues will be lost.
- The distance-based system could apply to Rapid and Express buses, to heavy rail, or to all rail lines. Fares would be based on increments of distance, with corresponding fare zone boundaries identified for each route. While existing hardware and fare media could be used, the agency might have to install fare gates or hire additional people for fare enforcement. An overall concern with a distance-based system is some riders may choose slower, cheaper parallel services because they cannot afford to pay a premium fare.
Transit agencies can offer deep discount group passes to employers and universities. In a 2004 dissertation, Cornelius Nuworsoo explores the benefits of discounted fare programs for groups and summarizes the outcomes of unlimited-ride pass programs in Berkeley and Denver. There is an associated Access Magazine article that can be found on the Access website at http://www.accessmagazine.org
Fares Based on Ability to Pay
The SFMTA is currently conducting a study on developing a fare system that takes into account passengers' ability to pay, rather than simply on their ages. The SFMTA does have a Lifeline pass program, which provides a 50 percent discount on the monthly pass for residents whose incomes are below 200% of the federal poverty level. However, fewer than 20,000 people use the Lifeline system, since it is burdensome and requires a lot of paperwork for all parties.  The proposed fare system would ideally cut down on red tape and provide discounts for those in financial need.
Fare-free transit is a topic has recently been receiving more media attention. There are many advocates for fare-free transit, who argue that eliminating fares would lead to faster loading and unloading times, less confusion over fares, and lower administrative costs. People would also feel more motivated to use public transit. However, there are also many disadvantages to consider. Fareboxes can cover a considerable percentage of agencies' operating costs, which is especially true for larger agencies, and removing fareboxes would require some agencies to look for other funding. Past experiments with fare-free transit saw operating costs skyrocket as demand exceeded capacity, creating even larger revenue shortfalls. Additionally, some of the fare-free demonstrations experienced increases in vandalism and "hooliganism", which drove away many regular bus commuters. 
Overall, the advantages of fare-free transit seem to be greater for smaller agencies or for limited portions of service. Smaller systems have a low farebox recovery, which might be canceled out by the cost of collection. For example, the transit system in Commerce, California is the oldest fare-free system, operating since 1962. They serve fewer than one million riders a year, and generally do not experience problem riders.  Chapel Hill Transit, which has been fare-free since 2002, also had a low farebox recovery rate, at about 10 percent. The agency managed to cover the revenue gap with extra funding from the university and taxpayers of Chapel Hill and Carrboro.  Other important issues to consider when going fare-free are maintaining service quality, providing paratransit, and security.
- San Francisco Muni Study
- In 2008, San Francisco Muni conducted a study on the cost-effectiveness of a fare-free system. The study concluded that Muni would see increased operating expenses and capital investments, even though the costs of fare collection would be eliminated. Muni would need an additional $184 million a year for operations, as well as an additional $519 million to procure the vehicles, facilities, and infrastructure needed to accommodate the ridership increase .
- "2012 Transit Fact Book"
- Evaluation of Time and Distance-Based Fare Policies
- "Deep Discount Group Pass Programs as Instruments for Increasing Transit Revenue and Ridership."
- Bay Area Considers Basing Transit Fares on Need
- Advantages and Disadvantages of Fare-Free Transit Policy
- How Fare-Free Transit Works in the United States
- Free ride? Fat chance: Muni fares will stay
Cervero, Robert. "Flat versus differentiated pricing: What's a fair fare?" 1981.
- Cervero explores the efficiency and equity of different pricing structure by comparing transit fares and the cost to provide service. He finds that flat fare structures generally result in short-distance, off-peak riders subsidizing long-distance, peak hour customers. A subscription is required to access this article.
Transit Cooperative Research Program. "Fare Policies, Structures, and Technologies: Update." 2003.
- The Federal Transit Administration commissioned this report to identify and evaluate different approaches to fare policy, structure, and collection technologies, with special consideration given to the customer benefits and challenges and equity concerns of each approach.
Transit Cooperative Research Program. "Transit Pricing and Fares: Traveler Response to Transportation System Changes." 2004.
- This document summarizes literature on ridership changes in response to different fare adjustments, including the introduction of variable fares and differentiating peak and off-peak fares. Few studies explore the relationship between transitioning to differential pricing and ridership levels.