UC Irvine Institute of Transportation Studies

The issue of returns to scale in bus transit continues to be a subject of debate among transportation analysts. From a public policy perspective, returns to scale are relevant to many policy areas such as transit service pricing, cost allocation, subsidization, and optimal firm size. This paper argues that conclusions regarding economies of scale are in large part the result of confusion regarding the concept of scale economies, variable definition, assumptions about the shape of the cost function, and certain characteristics of the data base. It is suggested that generalized cost functions with very few a priori economic restrictions can better represent the cost structure of the industry and therefore are more appropriate for measurement of scale economies.