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Abstract

This paper uses an indirect production function to decompose the effects of subsidies on output into the lump-sum, cost and inefficiency effects. Using 2006 data for U.S. transit systems it estimates an indirect production function and uses the results to calculate these effects. It finds that the lump-sum effects exceed the other effects and that the average total effect of the subsidies is a 73.23% increase in output. The range of the output change shows that in many transit systems the subsidies more than double the outputs they produce. The paper suggests that reductions in allocative inefficiencies from the subsidies would result in very large increases in output.

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