Question

The city government is losing millions of dollars on the mass transit system (buses and subways). The government proposes to increase the fare of a ticket by 20% to raise revenue and has asked your advice. You know that the price elasticity of demand for mass transit in the city is approximately equal to 0.75. What do you think of the proposal to increase the fare to raise revenue for the city?

Answer 1

Raising the city's mass transit fares by 20% is likely to increase revenue because the price elasticity of demand is inelastic at 0.75, indicating that a higher percentage increase in price will not cause a similarly large decrease in ridership. However, the potential impact on low-income individuals and the environment should be considered.

Step-by-step explanation:

The proposal to increase the fare of tickets for the city's mass transit system by 20% to raise revenue should be considered with the price elasticity of demand in mind. With an elasticity of 0.75, the demand for mass transit is inelastic, meaning that the percentage decrease in the quantity demanded from a fare increase is less than the percentage increase in price, suggesting that total revenue will go up. So, if the city government increases the transit fare by 20%, it is likely that revenue will increase as the drop in ridership will not be proportionately as large as the fare increase.

However, the government should also consider the broader impacts of such a fare increase on ridership, public welfare, and the environment. Raising fares may disproportionately affect low-income riders and potentially lead to more traffic congestion and pollution if individuals switch from mass transit to personal vehicles.