To mitigate automobile-caused externalities, several European cities have introduced fare-free transit schemes. Best known are the plans introduced in Hasselt, Belgium, and Templin, Germany. The staggering increases in ridership in both cities seem to prove the overwhelming success of this policy. In addition, a study carried out for the German Federal Ministry of Transportation scrutinized the program in Templin and found that a positive net effect is likely and fare-free transit is a viable policy to curb automobile externalities. Fare-free schemes are based on the economic theory of the second-best. Automobile users should be encouraged to shift to environmentally friendly transit. An undesired side effect, however, may be the increase in the demand by former transit users and the attraction of pedestrians and bicycle riders. In Templin, the side effect was prevailing, whereas the shift from automobile to transit was only minimal. The positive net benefit was due to the reduction in fatalities and casualties: Since pedestrians and bicycle riders belong to the most endangered road users, every decrease in these modes will lead to a reduction of automobile-caused costs. The undesired side effect thus became the main effect.