Subsidising public transport is a widely used policy, normally justified by redistributional
objectives. Frequent use of subsidies, however, does not mean uniformity, as the actual
subsidy rate varies between countries and cities. Excessive subsidisation of public
transport can also be criticised by the presence of externalities, most importantly
on-board crowding. This paper revisits Parry & Small (2009), one of the most influential
contributions in the recent history of public transport economics. Despite the popularity
of the Parry–Small model, it neglects existing empirical evidence on the effects of
crowding on passengers’ wellbeing. The purpose of the present study is to redesign
and recalibrate their model by expressing crowding disutility as a multiplier of the
value of in-vehicle travel time, and also to extend the analysis to the context of
the Hungarian interurban transport system. Our results show that the crowding externality
is a critical component of optimal pricing, as it decreases the optimal subsidy rate
by 4 to 29%, even at a moderate level of capacity utilisation. This means that optimal
fares are higher than they were previously found. We extend the original analysis
to the case of Hungarian interurban transport and highlight the model’s sensitivity
to the assumed substitution pattern.
