kkg: fixed and variable cost is good, but here's another little concept: elasticity of demand.
Folks living downtown get good service from TTC and they don't have or don't want to use their cars. They're a captive market. You can charge them too much and they will still ride the Rocket, thereby creating operating profit for TTC. Folks living in the inner suburbs do ride longer and cost more, but because their service is worse they are more price sensitive. If you charge them more, some of them will stop taking the TTC and get back in their cars. Then fare by distance might not be a winner for TTC or for congestion.
This I don't agree with you. It is true that folks (like me) choose not to own a car and prefer taking transit, however, that really doesn't mean we are not sensitive to price. On the contrary, our price elasticity is high because, as you know, downtown is not that big, and if you charge me high to go from Queen to Bloor, I'd just walk, or bike, whenever possible. It is when I have to travel long distance that my elasticity becomes much lower, as I have few alternative.
For the suburb folks, do you have high elasticity? I don't think. Unless they travel from on suburb to another, driving is a better idea. Actually I think driving make more sense than taking those horrible buses. However, if they come to Bay/King to work, do they still show high elasticity? no. what will then do? Drive along the DVP everyday for 1.5 hours, then park their car for $15 a day, and drive for another 1.5 hours back home? Don't kid ourselves, the poorer one is, the more he is dependent on transit (therefore low elasticity). For high income people, it doesn't matter. They prefer driving and avoid the crowd and uncontrollable schedule and don't care paying more for parking. Honestly, ask around, even ttc monthly pass becomes $150 next month, 95% of those who commute from the suburbs to downtown for work will still take the subway. No question about it. It is the downtowners who don't HAVE to take the subway for short distance travel. Toronto downtown is not that big. To bike from Parliament to Bathurst is a matter of 15 minutes. I myself regularly walk 20+ minutes to avoid paying $2.5.
In the end, it is not whether the downtowners or suburbanites have higher elasticity. It is those who live in the suburbs but have to get to downtown for work everyday that have the lowest elasticity. Even if fare rises to $5 per trip, it is $200 a month, still considerably cheaper than owning and maintaining a car (insurance $200-300, gas $200+? parking $250, plus cost of the car and maintenance etc). This is why TTC should ask them to pay higher fare, aka their fair share and it will most likely bring in more profit.
Personally, it is not that I can't afford ttc fare. I just think it is unfair against short commuters. If the fare rises to say, $3 per trip, it stops making sense to me and I will just cut my trips outside my walking/biking distance. Honestly, there is hardly anything in my life that I need but can't get between Queen st and College st. I hardly need to take the ttc for more than one round trip per week. Why do I ever have to go to Scarborough Town Center or North York Center? What's there that downtown doesn't? Almost nothing. If fare becomes $5, I can choose not to take it at all if I like and my life won't be affected much.