Paid-as-you-go: Optimal transport pricing and capacity subject to health benefits from walking and cycling

In urban mobility, the advantages of encouraging walking and cycling are manyfold. Apart from reductions in air pollution, traffic noise and congestion, walking and cycling also provide some non-internalised health benefits, either for door-to-door trips or as access modes. First, on first-best grounds, we show that the maximisation of social welfare implies the application of optimal subsidies for walking and cycling. We also derive optimal frequency of service and stop density rules for public transport, and optimal pricing rules for both public transport and cars, under different assumptions regarding health benefits. Second, we use a stylised multimodal transport model calibrated around a bus line in Oslo, to evaluate the impacts of health benefits on optimal transport policy. We find that first-best transport policies are substantially affected by the value of health benefits, with higher road tolls and a reduction in the optimal bus fare (which could be zero) when walking and cycling are optimally subsidised (first best). However, when walking and cycling cannot be subsidised (second best), the situation is different as both the road toll and the bus fare have to increase to keep the incentives to walk and cycle. The distance between bus stops significantly increases if the health benefits from walking as an access mode are considered in optimal service design.