Answer to Question #168000 in Microeconomics for Kweku

Question

The price elasticity of demand for urban transit fares has been estimated to lie between -0.1 and -0.6. Based on these results, what is the economic argument for raising transit fares? What political argument might local governments and transit authorities encounter in opposition to these economic arguments?

Answer 1

Solution:

Based on the above results, urban transit fares have an inelastic demand. This means that they are insensitive to price changes. That is, people's demand for the service will have a minimal change due to price changes. The economic argument for raising transit fares is to increase the total revenue of urban transit and cover the heavy costs of managing public transport by local governments and transit authorities. This is because urban transit is a necessity and by increasing its prices, the demand will still remain the same and a lot of revenue will be generated due to the higher prices.

This will receive a backlash from the public since urban transit is a necessity that they must use no matter the price. The local government and transit authorities will gain more since they will receive more revenue from the price increases as demand will remain unchanged. The increase in price will affect the consumption habits of the passengers as they will be forced to cut on some things in order to cover for the increased transport charges. The local governments and transit authorities will receive negative reviews and rebuke from the passenger and the public at large.