Designing an Optimal Subsidy Scheme to Reduce Emissions for a Competitive Urban Transport Market

With the purpose of establishing an effective subsidy scheme to reduce Greenhouse Gas (GHG) emissions, this paper proposes a two-stage game for a competitive urban transport market. In the first stage, the authority determines operating subsidies based on social welfare maximization. Observing the predetermined subsidies, two transit operators set fares and frequencies to maximize their own profits at the second stage. The detailed analytical and numerical analyses demonstrate that of the three proposed subsidy schemes, the joint implementation of trip-based and frequency-related subsidies not only generates the largest welfare gains and makes competitive operators provide equilibrium fares and frequencies, which largely resemble first-best optimal levels but also greatly contributes to reducing Greenhouse Gas (GHG) emissions on major urban transport corridors.