Market Failure Research& Analysis- Public Transportation in Shanghai

Public transportation plays a vital role in the daily lives of millions of individuals in Shanghai, serving as the primary mode of transportation for their daily transportation. According to a survey conducted on Shanghai's public transportation system, around 12.25 million people rely on it each day. The survey reveals that conventional buses account for the majority, with approximately 7.48 million passengers choosing this transportation method. Rail transit follows with 1.8 million passengers, while taxis cater to 2.96 million passengers (Yang, 2010). However, despite the significant usage and importance of public transportation in Shanghai, there are inefficiencies within the market, primarily caused by the firm structure of each market of the transportation method and the negative externalities associated with them. These factors contribute to market failures, which necessitate a closer examination of the challenges and potential solutions for Shanghai's public transportation system. 

Shanghai’s public transportation system has a diversity of market structures. The metro system is run as a natural monopoly market in which it offers a low price for all citizens and the government plays a pivotal role in its regulation. (lawinfochina ,2006) The taxi system is operated in an oligopolistic market with a few major companies dominating the market and leaving the market less competitive. The bus system is performing in a monopolistic market, in which the buses are all owned by 1 big company and the industry lacks competition. These market types play a significant role in operating Shanghai’s public transportation system. The characteristics of oligopoly, natural monopoly, and monopolistic markets have shown that a single or a group of sellers have control over price in these markets. (The Investopedia Team ,2020) Fewer competition in the taxi system leads to a higher price and reduced creativity, while monopoly in the bus system leads to inefficiency. The imbalanced supply and demand cause market failure. The market control in Shanghai’s public transportation system may cause pollution problems in the city.

Figure 1: Negative Externality in Production

The figure above represents the status of carbon-emitting vehicles within the status quo. The marginal private benefit represents the amount benefitted from providing a transportation service, such as through metro tickets, taxi fares, etc. The marginal private cost (MPC) represents the direct costs to fuel vehicles, including factors such as gasoline price and vehicle maintenance fees. The marginal social cost (MSC) represents the direct costs in addition to any externalities or side effects. It is seen to be above the MPC curve, which signifies that there is a negative externality that our society is impacted by. In this case, air pollution is the negative externality caused by vehicle emissions, resulting in an upward shift to go from the MPC curve to the MSC curve. Air pollution has made using vehicles more “expensive” due to the negative health risks associated with it, increasing the “cost curve”. 

Shanghai is one of the world’s largest cities; over 26 million people call Shanghai home. As a result, Shanghai is also one of the leading polluters, even among the largest cities in the world due to the high demand for transportation. Vehicle and factory emissions account for at least 50% of Shanghai’s air pollution, and power stations account for an additional 7.3% (IQAir, 2023). The burning of coal, which is necessary for many non-electric vehicles to run, contributes to 13.5% of Shanghai’s pollution (healthansafetyinshanghai, 2020). Pollution can have serious implications on respiratory health and can increase the chances of asthma, breathing problems, and lung disease (iqair, 2020). 

To mitigate this negative externality, the government has invested significantly in public transportation to make it accessible to all with the goal of decreasing total emissions. Nearly 3.6 billion people used the Shanghai Metro in 2021 and about 1.5 billion used public buses (Statista, 2024), showing the practicality and affordability of public transportation. Children under the height of 1.30 m get free tickets when taking the Metro to further encourage people to use public transportation. 

In addition, the government has taken measures to decrease the impacts of polluting vehicles. For example, in 2015, Shanghai Taxi drivers were subsidized a 1300 RMB subsidy to include a three-way catalytic converter in their cars which would decrease the harm of their emitted substances (healthandsafetyinshanghai, 2020).  

Due to the firm structures of each transportation market and the negative externalities, Shanghai's public transportation system exhibits signs of a market failure. The market structures of the metro, taxi, and bus systems are natural monopolies, oligopolies, and monopolies. The limited competition, higher prices, and inefficiency, caused by these three firm structures, contribute to imbalanced supply and demand. In addition, regarding negative externalities, the high demand for transportation leads to pollution problems in the city. While the government has implemented measures to address these issues, more comprehensive interventions are needed to promote competition and sustainability in Shanghai’s transportation market. 

MLA Citations:

“Regulations of Shanghai Municipality on the Administration of City Railway Communication (2006 Amendment).” www.lawinfochina.com, www.lawinfochina.com/display.aspx?lib=law&id=12895&CGid=&EncodingName=gb2312. 

The Investopedia Team. “Market Failure.” Investopedia, 7 Apr. 2020, www.investopedia.com/terms/m/marketfailure.asp. 

“Shanghai Air Pollution.” Shanghai Health and Safety, 20 May 2020, healthandsafetyinshanghai.com/shanghai-air-pollution/. 

“Shanghai Air Quality Index (AQI) and China Air Pollution.” IQAir, www.iqair.com/china/shanghai#:~:text=To%20be%20more%20precise%2C%20vehicle,the%20demolition%20and%20reconstruction%20sites. 

Yang, Yali, et al. “Evaluation of Shanghai Public Transportation.” International Conference on Computer and Communication Technologies in Agriculture Engineering, 2010, https://web.archive.org/web/20181123150420id_/http://www.ee.ic.ac.uk:80/timothy.barr10/yr2proj/wordpress/wp-content/uploads/2012/02/evaluation-of-shang-hai-public-transport1.pdf. 

Zhang, Wenyi. “China: Urban Public Transport Passenger Number in Shanghai 2021.” Statista, 3 Jan. 2024, www.statista.com/statistics/1187905/number-of-urban-public-transport-passenger-number-in-shanghai/#:~:text=Number%20of%20urban%20public%20transit%20passengers%20in%20Shanghai%2C%20China%20in%202021&text=In%202021%2C%20almost%203.6%20billion,or%20metro%20in%20Shanghai%2C%20China.