Economic analysis of financial subsidy in urban public transit

Subsidy is an essential financial instrument in "bus priority" policy which has been widely implemented in China since 2004. An economic analysis explains how the financial subsidy works in public transit and also indicates how to improve its efficiency. In this paper, the public transit subsidy is originally classified into four sorts according to objects and form of subsidy. This classification is the essential analytical framework in the entire analysis process. Several microeconomic theories and models are then used to make comparative analysis of the four sorts of financial subsidies. On the basis of the analysis, a conclusion is reached that the factor subsidy which is relatively more efficient should be recommended, and the gross subsidy which is relatively less efficient should be prevented.