Question

A nation’s government has determined that mass transit, such as bus lines, helps alleviate traffic congestion, thereby benefiting both individual auto commuters and companies that desire to move products and factors of production speedily along streets and highways. Nevertheless, even though several private bus lines are in service, the country’s commuters are failing to take the social benefits of the use of mass transit into account.

(a) Discuss, in the context of demand-supply analysis, the essential implications of commuters’ failure to take into account the social benefits associated with bus ridership.

(b) Explain a government policy that might be effective in achieving the socially efficient use of bus services.

Short answer

(a) The commuters' failure to take into account the social benefits associated with bus ridership will lead to increased pollution and is a negative externality for the environment.

(b) The government can start giving subsidies to the bus commuters of the difference in the prices to encourage them for continuing with the bus services.

Step-by-step solution

Step 1. Define Externality.

An externality is a consequence of an economic activity that affects the third party. For example, pollution is an externality.

Part (a). The demand-supply analysis.

Widely available bus lines will reduce traffic congestion by decreasing private vehicles. This may lead to external benefits such as transportation costs, pollution, and traffic congestion being reduced.

The use of public buses would increase both the price and the quantity demanded as the external benefit shifts the demand curve right.

Part (b). A government policy.

The government can start giving subsidies to the bus commuters of the difference in the prices to encourage them for continuing with the bus services. The policy of providing subsidies to bus commuters will attract a large crowd owing to the extra revenue they gain.