Friday, August 28, 2009

Twinkle, Northstar, price too high 

Last April I noted the nice service provided by the Albuquerque-Santa Fe Rail Runner, which cost me $8 for a round-trip. At that time I said
I'm not a transportation specialist, but I'm willing to speculate that the demand for urban rail is elastic, so higher prices decrease quantity demanded greatly. If so, would the fares being discussed for Northstar be too high?
We'll see shortly, because when they start running the train in November, you'll be paying $7 each way just to get to Big Lake, a much shorter distance than Albuquerque-Santa Fe. Weekends will have a discounted fare. There will now be as well another as-of-yet-undetermined charge for a bus link between St. Cloud and Big Lake.

According to a former public official $7 represents about 20% of the cost of running Northstar based on some assumptions about ridership. Wouldn't you want to price this to maximize total revenue? If so, do we really think $7 a ride does that? (For non-economists, here's a tutorial on the relationship between elasticity, pricing, and total revenue.)

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