Urban transport, like any other activity, generates an array of costs and benefits, both private and social. The difference between the purely private costs of an activity – those borne exclusively by the person undertaking it – and the wider costs becomes important when those generating the costs (and enjoying the benefits) are not faced with the full costs of their actions, i.e. there are external costs. The full social cost of any activity will be the sum of both the private and the external costs involved. With passenger transport the presumption in most large urban centres is that the social (internal plus external) costs exceed the social (largely private) benefits of car use.

In carrying out a cost benefit analysis money is used as the comparator. Changes in amounts of travel, travel time, and external costs such as accidents and the environment are assigned monetary values, based on observations of the choices which people make.

One may also consider wider economic benefits and health effects etc. Some of these effects may be difficult to put a monetary value on, but since they do imply a benefit they ought to be regarded as well.

When assessing the benefits of Public Transport both existing consumers and new ones have to be considered. For instance, if increasing the frequency of buses, this will increase the quality for all passengers.

In the analysis, costs and benefits are each calculated, relative to ‘doing nothing’, for each future year. The net benefit is then discounted to the present day and summed over all years in the appraisal period to give, as a single indicator of performance, a net present value of the benefits. The appraisal period will normally be longer than the plan period, to allow for longer-term impacts. A scheme with a positive net benefit is worth implementing; the option with the highest net benefit is the best.

Besides decisions on investments, cost benefit analysis should also be used for decisions on operation, e.g. the level of service supplied.

There is a need to distinguish between:

• Production efficiency / profit maximisation: traffic revenue - operating costs
• Market efficiency: (traffic revenue - operating costs) + user benefits
• Economic efficiency: (traffic revenue - operating costs) + user benefits – external costs

There is a contrast between the economic and market-efficient solution, which considers the user benefit of increased frequency, and the production-efficient solution, which does not.

Market efficiency, however, disregards the external costs of car use and does not give weight to costly transfer of peak hour trips from cars to public transport, which the economic-efficient solution does.

Based on welfare economics grounds there are arguments for public financial support of local public transport. One reason to support public transport is that road traffic gives rise to external costs such as traffic congestion, death and injury, noise, and environmental problems. If travellers can be transferred from cars to public transport, these negative effects are reduced. Thus, public financial support of local public transport may generate more benefits (for all users) than the cost of the support, and provide value for money. The use of public financing also contributes to social benefits for the community, such as the social inclusion of groups that have no direct access to a car (e.g. youth, low income groups, disabled) and contribute to equality between women and men in the transport system.

The level of public financing and fare box revenues depends on the density of the population and the market share of public transport. It is however difficult to say whether a high level of public financing is a condition for or leads to HQPT in small and medium-sized cities. There are successful cities with a fairly low level of public financing (and a corresponding rather high cost coverage from fares). This indicates, and similar to politics overall that there is no such a thing as a general optimal level of public funding of local public transport.

There are examples of cities with HQPT that have a very high level of public financing (e.g. some examples in Belgium of upwards of 80%, or as much as 100%). There are also cities where no public financing is paid to the operator at all, e.g. some in Greece and in the UK. In the cities analysed by PROCEED, the average cost coverage is 52% (cost coverage = share of fare box revenue in relation to the total incomes from fares plus public financing). This level coincides in many cases with the prevailing level in many European countries for local and regional public transport. It also coincides in many cases with the socio-economically optimal level according to cost benefit calculations (Ljungberg 2007).

Few cities in Europe apply public transport for free (‘zero tariff’): one example is Hasselt (Belgium). Another example is Kristinehamn (Sweden), although this reintroduced fares after a period. The general finding is that there can be a large increase in the number of trips – for instance in Kristinehamn trip numbers doubled). Generally, the increase in trips consists of new trips and of passengers that would otherwise have walked or biked; only about 20% are previous car users. It has been shown that a free fares policy might be an interesting option especially for smaller cities. Transaction costs are substantially reduced (no need for ticketing machines etc.). For larger cities free fares lead to higher fixed and variable costs, since additional vehicles are needed. A comprehensive study has been conducted on the consequences of free public transport in Denmark (Teknologirådet 2006).