Terminology

In public transportation, the objective of a pricing policy is “to determine a tariff structure that reconciles the user’s need for an affordable public service with the commercial interests of the operators while at the same time pursuing the authority’s social objectives” (Mezghani, 2008).

The Fare Structure can be seen as the sum of the full range of fare policy measures that can be applied short of a blanket fare rise or reduction. Policy elements that fall under this category include:

• Fare levels relating to geographical criteria:
• zonal system (London Underground): In a zonal system, the network is divided into zones with a flat fare whilst travelling within each zone. The price to be paid by the passenger will depend on the number of zones crossed.
• graduated distance based system (most rural UK bus networks): In a distance based fare system, the price per km is usually applied. For rail services, the fare system might enable station to station fares to be set that are distance dependent. For bus services, the concept of fare stages is used. A fare stage may be a single bus stop or a group of bus stops (where density of the network is high). The fare charged then reflects the distance travelled between different fare stages. The primary pricing basis for taxi services is distance based and it might include some time based elements as well (e.g. associated with waiting and congestion delay).
• flat fare (Paris metro, London buses): Flat fare systems imply that a flat fare is charged for every trip made regardless of distance travelled, or type of passenger. It may be suitable in situations where a majority of passengers travel approximately the same distance e.g. shuttle buses to airports from the city centre.

• Time differentiated fares: generally higher fares for peak period (throughout the urban rail networks in most European cities).
• Differentiation by journey purpose e.g. lower prices for leisure travel via weekend tickets or tickets including free entry to leisure venue. (E.g. Zürich Verbund)
• Differentiation by regularity of use e.g. day/week/month/annual pass. (Paris' Carte Orange (Orange card),
• Relative prices of singles and returns.
• Through ticketing arrangements between operators and modes e.g. London travel card. (Washington Metropolitan Area Transit Authority's SmarTrip card)
• Concessions for particular passenger groups e.g. bus pass for the elderly.
• New technologies such as smart cards are also relevant here inasmuch as they allow a complex and refined fare structure and can also facilitate through ticketing arrangements. They also provide for pre-purchase, and can be promoted by offering lower fares to smart card users. (Maryland Transit Administration's integrated smartcard programme, Oyster card, Octopus card)

In the whole range of fares considered, concessions are usually available and may be provided to some or all of the following groups:

1. senior citizens
2. full time students or students within certain age groups
3. military personnel
4. travellers who are registered disabled
5. family groups.

Note that concessions and new technologies are not covered in detail under this policy instrument because they are covered elsewhere in Konsult under Concessionary Fares and Intelligent Transport Systems respectively.

Elements of a Fare Structure

The two primary motivations in the design of a fare structure are profit maximisation and welfare maximisation. A public sector operator, with public sector objectives, will tend to focus on welfare maximisation, whilst a private sector operator's priority will be the maximisation of profits. A public sector operator will nonetheless need to consider the financial implications of every decision that it makes, and conversely the private sector operator may not have complete freedom to pursue the maximisation of profits with no regard for overall welfare.

The various elements of a fare structure are detailed in Table 1 below, along with the likelihood of each element being used when the aim is to profit maximise and also when the aim is to welfare maximise.

Table 1: Elements of a fare structure and suitability for profit maximising and welfare maximising fare structures

Policy element	Purpose and impacts	Appropriateness for profit maximising fare structure	Appropriateness for welfare maximising fare structure
Flat fares	Provides simplicity but may encourage longer journeys/ dispersed development patterns and can distort transport and property markets at the edge of the flat fare area. Also can be seen as unfair.
Zonal system	Provides simplicity whilst avoiding the pitfalls of encouraging longer journeys/ dispersed development but can distort transport and property markets at the edge of zones. Also can be seen as unfair.
Graduated distance/time based system	Allocates capacity efficiently because fare reflects distance travelled. Avoids market distortions of zonal and flat fare systems. Perceived as fair by passengers.
Time differentiated fares	In order to encourage off-peak travel by those that have the option, so as to increase overall capacity.		(more likely if capacity is limited)
Differentiation by journey purpose	In order to be able to offer lower prices for price elastic trips such as leisure travel, whilst still maximising yield from other passengers.
Concessions for particular passenger groups	To improve accessibility for those groups whilst making use of spare capacity.	(if the group in question has a price elastic demand)
Differentiation by regularity of use	To encourage greater use and because regular users are more price sensitive.
Through ticketing arrangements between operators and modes	To improve convenience for passengers.	(Unlikely voluntarily because reduces competitive advantage of dominant operator)
Smartcard ticketing	Improved convenience for passenger and operator with reduced boarding time and allows more sophisticated pricing structure.	(Providing operator has large enough market share to justify investment

= less likely

= more likely