System size and cost structure of transit industry

Knowledge of the cost and production structure of transit systems can be in strumental in uncovering an array of important information regarding their operation. Optimal fleet size and pricing, average and marginal cost, and t he potential for success of deregulation and privatization efforts can be a ddressed successfully when the cost structure of transit systems is known. Research on the cost structure of mass transit systems using panel data fre quently shows conflicting results with respect to issues such as economies of scale and density, and factor substitution elasticities. In this analysi s we extend prior research in two significant directions. First, we control for cross-sectional heterogeneity that may otherwise seriously bias the re sulting parameter estimates. Second, we make an explicit effort to capture differences in the economies of scale between large, medium, and small tran sit systems, Based on panel data for fixed-route public transit systems, th e results indicate that transit services an characterized by a nonhomotheti c production function, exhibiting returns to density and scale that depend on the size of the transit firm.