Due in part to the pandemic, which changed the way many workers do their jobs, public transit is in trouble in Quebec and Atlantic Canada. And while bus companies in these provinces already receive millions in subsidies from taxpayers, advocates are now calling for even more.

But this is the wrong route to follow. Subsidies often incentivize bad “cost control” behaviours by firms as they slack on managerial efficiency. The better solution is to deregulate the industry to facilitate entry and competition by non-traditional providers.

Most provinces—with the notable exception of Alberta—have strict entry regulations for bus transport that were designed in the 1920s and 1930s. The goal back then was to limit competition. Exclusive permits, which are tantamount to monopoly, were granted for certain bus routes, thus allowing regulatory agencies to limit fare increases. Bus operators were expected to provide the same level of services on less-profitable routes by using higher profits on the monopolized routes to finance operation on the latter. This is still the model in place today (with some variants) in most provinces.

The result? Fares per-minute travelled are much higher in Canada than in the United States (where the industry is less regulated) or the United Kingdom. According to studies on the deregulation of intercity bus services for countries such as Germany, Ireland, Italy, Japan and the U.K., consumers enjoyed lower prices on the most frequented routes. The Italian and German experiences with deregulation show no loss of service on less popular routes or even increases in services. Overall, the average rider seems to gain from deregulation.

Opponents of deregulation often argue that remote areas will suffer losses of service, especially in a country as vast as Canada whose population density is quite low. But to make this claim, critics of deregulation labour under a strange assumption—the industry must stay as uniform as it is now. However, the point of deregulation is to allow greater differentiation in the types of services—something that the Japanese experience with deregulation showed convincingly.

For example, a deregulation plan could allow firms to offer transportation services with different types of vehicles (e.g. minibus, vans, shuttles) with different quality levels (e.g. high-speed Internet, larger seats, fewer stops). Most importantly, it must allow different organizational structures such as for-profit carpooling or occasional service providers (e.g. Uber, Lyft and other applications). Burdensome and costly license requirements discourage service providers from entering the market. Unless one commits to making intercity transport a full-time occupation, the application process is not worth the time and effort.

However, without those regulatory barriers, people can more easily become transit providers on a part-time basis (e.g. one day a week) and thus expand services to more remote areas without having to operate a full-size bus.

The experience with intercity bus deregulation in other countries tells us that increasing government spending on public transit is the wrong course of action. In fact, the only question that we should consider is not whether to deregulate, but how to best deregulate.