Question

Draw a diagram of this nation’s market for automobiles, which are a substitute for buses. Explain how the government policy you discussed in part (b) of Problem 5-5 is likely to affect the market price and equilibrium quantity in the country’s auto market. How are auto consumers affected by this policy to attain the spillover benefits of bus transit?

Short answer

The diagram of the nation's market for automobiles is,

The automobile market will fall as people will be using more of public buses.

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.

Step 2. The market for automobiles

The diagram for the market for automobiles,

The government's policy was to provide subsidies to all bus commuters which would attract a greater amount of the public. Since commuting by bus will be cheap as compared to automobiles so the price and quantity will both decrease for automobiles.