Subsidy and Local Bus Service Deregulation in Britain: A Re-evaluation

Local bus services in Britain (excluding London) were deregulated in October 1986. Bus vehicle kilometres increased after deregulation, but passenger journeys fell and bus fares increased in real terms. The inability to reverse the long-run decline in passenger journeys and the increase in bus fares is often cited as evidence of the failure of deregulation to promote greater competition in the industry. This evaluation is not clear-cut, however, since government macroeconomic policy caused significant reductions in subsidy to the bus industry concurrent with deregulation. It can be argued that it is the reduction in subsidy, rather than the lack of competition, which caused fares to increase. If this is the case, then the evaluation of deregulation should allow for the effects of subsidy reduction. This paper specifies and tests an econometric model in which the role of subsidy reduction is explicitly incorporated in a price-markup equation. The model can be used to generate forecasts of bus fares and passenger journeys after allowing for subsidy replacement. These forecasts are compared with those for the continuation of the regulated system. A cost-benefit analysis calculates the net present value of the internal and external welfare gains from deregulation per se in Britain excluding London for 1986-97. A similar analysis is conducted for the metropolitan and non-metropolitan areas of Britain. ? The London School of Economics and the University of Bath 2001