You have been hired by the city to determine whether or not an increase in the p

Question

You have been hired by the city to determine whether or not an increase in the price of tickets for the mass transit system would raise system revenues. The debate has been heated and the city council seems to be divided. One side argues that in order to increase revenues from the transit system, prices must be increased. The opposing side argues that a price increase at this time will lower revenues. What assumptions are each side making about the price elasticity of demand, and how might you determine the best course of action?

Explanation / Answer

It is conventional thinking that keeping transit fares as low as possible will result in high ridership levels. It is also true that raising fares would have a negative influence on ridership. So, we should allow the market to set transit fares along with a number of key reforms which could actually increase transit ridership, even if prices increased. We should also keep in our minds that public transit is a welfare service that ought to be virtually free so that it could accommodate the poor. Persistent efforts should be made by the transit agencies to convince people who can afford to drive, that transit is a better option. Convenience, and not lower prices, is the key.

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