Application of subsidies

Where government subsidy is provided, either from any dedicated external charges or from central funds, then the nature of the subsidy has a major impact on its cost and effectiveness.

General subsidies to all users through low fare levels can prove very costly as the willingness and ability of many passengers to pay higher fares is lost to the sector. Capital subsidies to operators may be captured by their suppliers, and not be passed through to passengers. Direct operating subsidies remove incentives for efficiency gains, and may be captured by organized labor where there is a lack of effective competition for service provision.

Direct subsidy of targeted user groups is generally more effective, but can sometimes prove difficult to administer where household formation is informal and regularly relocates. For this reason, it is rarely applied in developing countries though it was formerly routine practice in the command economies.

A more widespread application is cross-subsidy within the transport system whereby passengers on high-demand routes effectively support uneconomic services elsewhere in the network, and full-fare passengers support concessionary travel for beneficiary groups. However, unless there is transparency in the source and application of such funds, there is a risk of the misallocation of resources.