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.
Cities provide a variety of services, such as parks and libraries, to everyone with no direct fee. Proponents of fare-free transit argue that public transportation should be provided in the same way. Fare-free transit would be beneficial to low-income riders, especially to people of color who are more likely to be stopped for farebeating. Fare-free transit is also seen by supporters as a way to reduce dwell times, lower administrative costs, and grow transit ridership. Opponents of of fare-free transit argue that the lost revenue, when coupled with additional demand, would stretch agency resources too thin and harm service quality. There are also concerns about loitering and vandalism, though the extent to which this is a serious problem is a matter of debate.
The practicality of fare-free transit seems to be tied in part to the size of the system. There are multiple possible reasons for this, but farebox recovery ratios play a role. Large transit systems like those in New York City or the San Francisco Bay can have farebox recovery ratios of more than 40%, meaning that switching to fare-free service would represent a huge loss in revenue. On the other hand, for small systems that number might be less than 10%. Given the cost of collecting fares (fareboxes, payment processing systems, increased dwell time), it's possible that moving fare-free could actually improve system finances. Successful fare-free system are typically in small areas dominated by either universities or resorts.
Fare-Free Case Studies
- Corvallis Transit System - CTS serves a Corvallis, OR, a city of 55,000 people (including 20,000 Oregon State University students). In 2011 CTS made the decision to go fare-free as a way to reduce car dependency. Funding, which had previous come from fares and student fees at OSU, was replaced with a $2.75 a month charge to Corvallis Utility customers. The program has been seen as a success; ridership grew nearly 38% in the first year and schedule performance improved. The program is relatively new, but seems to be performing well.
- Breckenridge Free Ride - Breckenridge, CO is a ski resort town with a population of just a couple thousand people, but 50,000 visitors a weekend during peak season. The city set up a fare-free transit system to ease tourist congestion and help residents get around. Free Ride had 670,000 riders in 2009. Operational expenses come out of the town's general fund. This has worked so far but is susceptible to economic downtown, so the town is looking for new funding mechanisms. Ridership is steadily growing, and strict anti-loitering rules keep the buses moving smoothly.
- Link Transit - Washington State's Link Transit is a larger rural system serving 105,000 people over and area of 3,500 miles. It currently operates 55 buses and 22 paratransit vehicles with a budget of $11 million per year. It was established in 1989 and had no problems operating fare-free for the next decade. However, in 1999 voters eliminated the motor vehicle excise tax that had provided Link Transit with most of its funding. The agency lost 45% of its operating revenue and was forced to charge fares. The conservative area had never fully embraced the fare-free system. The current fares account for 6% of operating expenses and disproportionately effect minorities and the elderly.
- San Francisco Municipal Railway - 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. The city abandoned its fare-free plan after seeing the results of the study.
- "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
- Volinski, J. (2012). "Implementation and Outcomes of Fare-Free Transit Systems." Transit Cooperative Research Program.
- Rinde, Meir. (2015). "The List: The 10 U.S. Transit Agencies that Rely Most on Fare Revenues." NJ Spotlight.
- Gordon, R. (2008). "Free Ride? Fat Chance: Muni Fares Will Stay." SFGate.
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.