Related to cost of production

Relating fares to the cost of production needs to recognize the character of those costs, and the factors with which they vary. All modes have some fixed costs (such as fleet finance or lease charges), some that vary directly with distance operated (such as fuel and tires), and others that have a semi-variable relationship (such as maintenance, based on both time and distance).

Fares calculated on this basis would thus also include a charge for access to the service and a charge in relation to the distance traveled, and again result in a taper reduction in the unit cost of travel with increasing distance. The rate of the taper would reduce, though, to the extent that the allocation of fixed costs was related to the resources required to operate the route.

One advantage of setting fares in this manner is that fare changes may be made formulaic in relation to changes in input unit prices, and hence released from political discretion.