Is the Mexico City metro an inferior good? Amado Cro ˆtte a , Robert B. Noland b,Ã , Daniel J. Graham a a Centre for Transport Studies, Department of Civil and Environmental Engineering, Imperial College London, London SW7 2AZ, UK b Alan M. Voorhees Transportation Center, Edward J. Bloustein School of Planning and Public Policy, Rutgers University, New Brunswick, NJ 08901, USA article info Keywords: Public transport Developing countries Price elasticity Mexico City abstract Time series cointegration techniques are used to estimate whether the Mexico City metro is perceived as a normal or inferior good. Owing to the fact that the Mexico City metro mainly serves the low income sectors of the population, this paper attempts to separate the overall income effect into two uncorrelated components: a vehicle stock effect (used as a proxy for medium/high income) and minimum wage effect net of the influence of vehicle stock (used as a proxy for low income). The time series cointegration results show that minimum wage elasticities are positive whilst vehicle stock elasticities are negative. These results suggest that for the majority of metro users, whose salaries are based on low multiples of the minimum wage and are not potential car owners, the Mexico City metro is perceived as a normal good. However, for middle/high income earners, who can afford to buy a private vehicle when their incomes increase, the Mexico City metro is perceived as an inferior good. & 2009 Elsevier Ltd. All rights reserved. 1. Introduction The responsiveness of public transport demand to changes in fares, income, quality of service, the price of competitive modes and several other factors has been explored extensively. A comprehensive up to date review is given in Paulley et al. (2006). Although the magnitude and in some instances the sign of the elasticities vary between studies, some generalisations can be drawn from the ample array of estimates. Elasticity values vary depending on the level of aggregation of the data used for estimation, as well as its periodicity. In addition, the variables included in the model, the theoretical form of the demand relationship and whether the model allows for some type of lagged demand response will affect the magnitude of the elasticities. In addition to these differences, Litman (2004) shows that elasticity estimates also differ between studies depending on the level of competition between modes, type and size of geographical area, type of trip, type of user and type of public transport mode. A number of previous studies have attempted to determine whether pubic transport is perceived as an inferior or normal good, e.g. Bresson et al. (2003) and Schimek (1996). A negative income elasticity of demand would indicate that as incomes grow the demand for public transport decreases, therefore suggesting that public transport is an inferior good. A positive coefficient, on the other hand, would indicate that income increases result in increased patronage, suggesting that public transport is a normal good. Although the public transport literature provides studies that report both positive and negative income elasticities, there seems to be agreement about the sign of the elasticity depending on the demand model specification and the type of public transport analysed. In general, when vehicle stock is not included in the model, the income variable will tend to capture the negative effect that vehicle stock has on the demand for public transport (e.g. Dargay and Hanly, 2002). 1 When vehicle stock and income are included amongst the explanatory variables, the income coefficient will tend to be positive (e.g. Wardman and Preston, 2001). However, with the use of aggregate data, correlation between these variables usually generates statistically insignif- icant estimates. Income elasticities also vary depending on the mode analysed. The review by Paulley et al. (2006) suggests that income elasticities for rail tend to be positive regardless of the specifica- tion of the demand model, whilst bus income elasticities tend to be negative. Cro ˆtte et al. (2008) use time series and panel cointegration techniques to estimate the effect that fares, income, quality of service and fuel prices have on the demand for the Mexico City metro. They find negative income elasticities, which may suggest that the Mexico City metro is perceived as an inferior good. However, since vehicle stock is not included in their model due to ARTICLE IN PRESS Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/tranpol Transport Policy 0967-070X/$ - see front matter & 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.tranpol.2009.02.009 Ã Corresponding author. E-mail address: rnoland@rutgers.edu (R.B. Noland). 1 Fitzroy and Smith (1998) do not include vehicle stock in a public transport demand model for Freiburg and obtain positive income elasticities. They associate this result with the introduction of low cost travel cards. Transport Policy 16 (2009) 40–45