Answer to Question #308765 in Microeconomics for Dud

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 arguments might local governments and transit authorities encounter in opposition to these economic arguments?

Answer 1

A negative price elasticity of demand between 0.1 to 0.6 implies that there is an inverse relationship between price and demand of transit fares. However, since it is a value that is less than one, the inverse relationship is not evenly distributed meaning that a higher price does little in reducing the demand. In other words, increase in prices leads to a disproportionate decrease in demand of transit fares.

The political arguments that can be given by the local governments may include that the increase in price is only done at specific areas in the economy with other areas having constant prices. Further, transit authorities can argue that the importation price of the vessels have increased, which lead them to increase the transit fares in a disproportionate amount.