A nation’s government has determined that mass transit, such as bus lines, helps

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 into account the social benefits of the use of mass transit. As shown in the figure below, if the social benefits associated with bus ridership were taken into account, the demand schedule would be D' instead of D, and the market price would be higher. The equilibrium quantity of bus rides would be higher. Which government policy might be effective in achieving the socially efficient use of bus services? (Multiple Choice)     

a. The government could pay commuters a subsidy to ride the bus, thereby shifting the demand curve outward and to the right. This would increase the market price and equilibrium number of bus rides.

b. The government could charge commuters higher fees to ride the bus, thereby shifting the demand curve outward and to the right. This would increase the market price and equilibrium number of bus rides.

c. The government could charge a steep tax for commuters who ride the bus, thereby shifting the demand curve outward and to the right. This would increase the market price and equilibrium number of bus rides.

d. None of the above.

Explanation / Answer

Correct Answer:

A

When subsidy to the commuters will be given, then demand curve will move to the rightward direction. It will create higher quantity and higher price at a new equilibrium.

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