Economics essay: Discuss whether subsidies alone are a sufficient policy to halt the decline in demand for local bus services (20 marks)

HideShow resource information
  • Created by: Jade
  • Created on: 24-12-12 16:36
Preview of Economics essay: Discuss whether subsidies alone are a sufficient policy to halt the decline in demand for local bus services (20 marks)

First 452 words of the document:

Discuss whether subsidies alone are a sufficient policy to halt the decline in
demand for local bus services (20 marks)
Recently, the demand for buses has been declining; many argue that this is due to the
inconvenience and unreliability of bus services, high fares and substitutes like cars
providing much more independence and flexibility within an extensive road network.
A subsidy is a payment usually from the government to encourage consumption or
production of a good or service. In the case of local bus services, subsidies can be used
in many different ways to halt the decline for local bus services as shall be explored in
the body of this essay.
The government can subsidise non-profitable routes. Non-profitable routes involve
loss-making services, for example in rural areas, as these services are usually very
costly to run due to the low passenger numbers. This essentially means that at P1
and Q1, costs are higher than revenue (as shown in the left diagram below) therefore
bus companies operate at a loss as they are not gaining enough revenue to cover their
costs. As a result, bus companies do not have an incentive to operate these services.
If the government subsidise these services, it will cover more costs for a bus operator
and therefore bus companies may decide to run these services as they will be more
likely to either break-even or make normal profit (as shown above at P1 and Q1 in the
right diagram). The government can also subsidise specific bus routes to make them
cheaper. More local bus services operating on these newly subsidised routes and
socially necessary services will lead to an increase in supply and therefore frequency
on such routes. As a result, it should halt the decline in demand as consumers will
recognize that buses are a more reliable convenient option.
As buses are an inferior good and have a low, even negative income elasticity of
demand, they are used mostly by low income groups, such as pensioners. The
government can subsidise bus fares for pensioners and students, this will result in
cheaper fares, from P* to P2 and also increase consumer surplus from area A to A+B. It
will also increase the quantity demanded from Q* to Q2 and therefore halt the decline
in demand for local bus services (as shown in the diagram below). The quality of bus
services can also be subsidised, for example providing subsidies for new, more
comfortable seats, which may enhance consumers desire to opt for taking a bus
Jade

Other pages in this set

Page 2

Preview of page 2

Here's a taster:

Discuss whether subsidies alone are a sufficient policy to halt the decline in
demand for local bus services (20 marks)
instead of other modes of transport and therefore increase demand for local bus
services.
However, there are many reasons why subsidies may not work. Firstly, it depends on
the size of the subsidy ­ a subsidy must be set at the right level; it must be high
enough to cover costs so that bus companies do not operate at a loss.…read more

Page 3

Preview of page 3

Here's a taster:

Discuss whether subsidies alone are a sufficient policy to halt the decline in
demand for local bus services (20 marks)
demand to a bigger extent than just subsidising fares to those of lower income
groups.
Furthermore, perhaps a way of increasing demand for bus travel is to decrease
demand for car travel. This may provide a greater increase in demand for bus travel as
consumers will be forced to consider other modes of travel. A way of doing this could
be to introduce road pricing.…read more

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all resources »