1Regulated monopolies in urban public transport Can we design proper regulations and incentives?

A model of the public transport company in Oslo is used to the design a system of price regulations and subsidies. The objective is to provide incentives for optimum provision of public transport services both for peak and off-peak demand. Optimum is defined in terms of fares, level of service and average capacity per revenue kilometre. The cost of public funds and the fact that car traffic is priced below marginal cost in peak periods are taken care of in the model. The regulator determines the fares, the transit operator receives a subsidy per revenue kilometre, differentiated between basic services and additional services operated only in peak periods. There is also a subsidy per passenger in peak periods due to underpriced car traffic. The results indicate that it should be possible to have regulated monopolies in local public transport that gives a proper supply of services based only on commercial incentives. 1