Transport Economics (SPT-E4050)
Homework Problem 2
Presented below are some completely hypothetical passenger figures for public transport
services in a hypothetical city.
Transport mode:
Daily usage (thousands):
Rail
55
Bus
90
Underground
20
Total
165
For this hypothetical public transport market, the following elasticities apply:
Income elasticity of
demand
Own & cross price
elasticities w.r.t.
Rail
Bus
Underground
Rail
Bus
Underground
0.41
-0.50
0.32
-0.45
-0.40
-0.30
0.08
-0.40
0.10
0.02
0.05
-0.20
Note: modes listed on columns relate to the quantity change in demand, those listed in rows relate to
change in price. For example, the rail-bus figure of 0.08 is the percentage change in bus usage as a result
of a price increase in rail services.
a) If there is a 5 percent rise in income, what would be the new daily modal splits and the
new total daily usage?
b) Based on your answer to (a), what is the overall income elasticity to travel by public
transport?
c) Calculate the effect on modal splits and the new daily usage of the impact of the
following factors (each should be considered on its own) and highlight which modal fare
has the largest impact on the overall demand for public transport services in this city.
i. A 25 percent increase in the level of rail fares
ii. A 25 percent increase in the level of bus fares
iii. A 25 percent increase in the level of underground fares
d) What might be expected to happen to the cross-price elasticity of rail services across all
other modes if the level of rail travel was to significantly increase? Why would this
happen?
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Transport Economics (SPT-E4050)
In order to finance a considerable improvement in public transport provision, the government
needs to raise significant levels of public finance. Increasing income tax is not seen as a realistic
option due to the unpopularity of such taxes with the electorate. The government therefore
decides to raise this finance through an expenditure (as opposed to an income) tax.
e) What type of good (price elastic or inelastic) should the government impose this tax
upon?
In order to help answer these questions, you should draw two illustrations in the
form of the basic market graph, which illustrate the shift in the supply curve as a
result of the increase in tax and then note the effect this would have on an elastic
and an inelastic good.
f) Who bears most of the burden of the tax for each type of good? Is it the consumers or
the suppliers of the good?
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