Answer to Question #166838 in Microeconomics for Joy

Question

If urban transit fares have inelastic demand, what political arguments might local governments and transit authorities encounter in opposition to the economic argument for an increase in urban transit fares?

Answer 1

Solution:

An inelastic demand is when a buyer’s demand for a service or product does not change much due to changes in price. When the demand is inelastic, an increase in price will result in an increase in total revenue due to the higher price and static quantity demanded. This means that businesses that deal in inelastic goods or services can increase prices, selling a little less but making more revenues, since the products or services offered are normally a necessity.

Therefore, increasing the prices of urban transit fares, which is a necessity and has an inelastic demand will receive a public backlash. This is because the public that uses the urban transit fares, will suffer by paying higher prices at the expense of the local governments and transit authorities who will gain more in revenues. The local governments and transit authorities will be perceived as taking advantage of passenger’s plight in the price increase, which will impact on their credibility. The fact that the service is a necessity, no matter the prices set, demand will not be affected. Passengers will still pay the high prices which will not be fair to them.