Towards achievement of both allocative efficiency and X-efficiency in public transport

Counties are responsible for local public transport in Norway. The prevalent form of organisation is that private companies operate on net-cost contracts for the counties. The county authorities determine both the fares and the level of service. Competitive tendering is permitted and the threat of tendering has contributed to increased X-efficiency in the bus industry. The main problem at present is the lack of incentives for market, or allocative efficiency. A new type of contract has recently been introduced in Norway. It allows operators greater freedom in the design of services, and a remuneration scheme is linked to the level of service provided. It is intended that this remuneration to operators will internalise the social benefits from an improved level of service since only a small fraction of these benefits is captured by increased fare revenue. By proper design of the remuneration scheme, the level of service provided by private operators who maximise profit will approximate the social optimum.