Optimal supply of public transport: subsidising production or consumption or both?

This paper compares two approaches for providing public transport: competitive tendering and vouchers. The functioning of tendering is well known. The voucher alternative means that commercial operators charge passengers a fare and are also paid by the public sector principal for each. The paper establishes that it is also necessary to subsidize quality, here referring to the number of busses. Under full information, the two approaches would result in the same welfare maximizing outcome. Vouchers may be more expensive for taxpayers. The case for vouchers is shown to be stronger under an asymmetric information framework.