The Streamline bus system in Bozeman started as a fare free system in 2006. This benefits both riders and non-riders because it leads to increased use of transit and less congestion, fewer parking problems, less air quality problems, and less carbon emissions. Furthermore, charging fares would not improve the revenue stream.
Larger urban rail systems in the United States range in farebox recovery ratio between 13% and 67%. Smaller communities like Bozeman have a ratio around 10%. These fares are an above-the-line deduction before calculating federal match.
If a system has a $1 million budget with $100,000 in farebox returns, this is deducted before running the match ratio, resulting in $900,000 of eligible expenses for federal match. At a 54% federal match rate, the net increase in revenue is $46,000 for the $100,000 in fares.
Expenses can run higher than this increased revenue. Montana State University students would continue to ride free because they pay through student fees. Seniors, people with disabilities, and qualified people with low incomes would ride free or at a discounted rate. Assuming MSU students are 50% of 140,000 rides per year, Streamline has 70,000 non-MSU rides. If regular fare was $1 and 1/4 of non-MSU riders paid a discounted fare of $0.50, Streamline could collect $61,250, assuming no loss of ridership. Since this is deducted before calculating federal match, the federal match could decrease by about $33,210. Gross increase would be $61,250 - $33,210 = $28,040. Additional costs could easily exceed this amount and Streamline could lose money. Ridership would probably decreases because of a fare, resulting in a larger loss of funding.
With fares come the cost of installing fareboxes, printing and distributing tickets, collecting and counting money, and enforcement. An automated farebox costs around $21,500, while low-tech fareboxes should cost less. Large systems report spending 1% to 20% of the revenue on the cost of collection. A 1994 report on this subject completed for Washington State DOT indicates a cost of 2% to 7% of operating costs for systems in that state. For the hypothetical Streamline case, that equates to $20,000-$70,000 operating cost beyond the capital cost. Looking at it from a different perspective, managing fares could cost 1 full-time equivalent employee at Streamline, wiping out any increased revenue. The routes would become less efficient as the drivers take time to collect and explain fares. Only if a community has local match that exceeds eligible federal allocation would charging fares result in increased revenue.
A study by the International Center for Technology Assessment found that after accounting for government subsidies, pollution cleanup and other costs, the real price of gasoline is estimated to be somewhere between $5.60 and $15.37 per gallon. Were gasoline sold within this range of prices, people might voluntarily drive less, choose more fuel-efficient vehicles, and use transit.
Drivers do not pay per use, and in Bozeman they predominately don't directly pay to park. Instead, property taxes and federal taxes cover these expenses. The gas tax doesn't cover the whole cost of building and maintaining the highway system either.
As paraphrased from a great series of articles on this subject: Why are passengers forced to fork over handfuls of change every time they board a bus, or to pay escalating costs for transit passes? Other social goods, from schools to health care to the road system, are funded by the broader public through taxes, and daily use is free of charge. Why not the same for public transit, especially since charging for it tends to penalize the poorest in society, and encourage polluting behavior?
From that series by Dave Olson:
Skagit Transit in Washington State recently calculated that it takes in $121,300 from fares but spends $133,385 to collect them. The irony here is that the system started out fare-free and changed to a user-pay system because taxpayers did not want people to have a "free ride." Now it costs taxpayers more than when it was fare-free.
In 1994, a report by the Washington State Department of Transportation came to the following conclusion:
"The cost of adopting a fare-free policy is minimal. Half of the transit systems in Washington return less than a 10 per cent fare box recovery rate. Our analysis demonstrates that once the costs of collecting fares are deducted (usually from 2 per cent to 7 per cent of operating costs) little, if any, net revenue is generated. We conclude that fare-free policy does make a difference and that smaller communities especially are better served by a fare-free transit policy."
David Olson's five-part series is summarized in one article here.
The Victoria Transport Policy Institute calculation of costs and benefits is located here. According to this methodology, the overall estimated cost per vehicle per year is $13,000. $3,700 is the cost taken on by society; the rest is the cost to the individual. If you are interested in these calculations, check out the "Cost Summary and Comparison" section.