Transit subsidies and regulation: Lessons from the Israeli experience

The Israeli transport sector, like those of many other countries is subject to complete government control with regard to fares, entry into the market, terms of operation and subsidies. It is unique, however, in that the fares charged are remarkably low and that the major transit mode, buses, is operated by privately owned companies. This paper explores what makes this low level of fares possible and in doing so examines the principal characteristics of the sector. It shows that this phenomenon cannot be explained by the amount of subsidy given to the operators but must be attributed to other factors, mainly the efficiency in the production of the services which is motivated by the profit maximization objective of the operators. The paper further argues that government policies regarding subsidy and regulation are generally inefficient as they cause misallocation of resources.