Introduction to economics 2004/5
Microeconomics essay marking guide
THE ECONOMICS OF THE LONDON UNDERGROUND
Word limit: 1500 words
Due: November 22nd 2004
To be marked and returned to students by: the first week of the second term 2005.
Before marking this coursework, please consult the following:
The criteria for marking coursework essays at
http://www.city.ac.uk/andy/teaching/ite/criteria.htm
The Economics Department’s grade descriptions at
http://www.city.ac.uk/economics/forms/gradedescriptions.html
Section 5 of the Part I Student Handbook, on Coursework and Examinations,
including the Coursework Charter.
General:




The coversheet should be correctly filled in, clearly indicating the student’s
details and providing a word count.
If the word count is absent, or clearly false, or is over 2000 words, markers
should feel under no obligation to read all of the essay. No explicit penalty
should be applied for over- or under-length essays. The students penalise
themselves by making it more difficult to answer the question or trying the
marker's patience, respectively!
Plagiarism should be treated seriously: students found to have copied from
another student (or to have allowed their work to be copied) or from a
textbook or other source without attribution should be given a mark of zero,
and a statement placed on their file explaining why they obtained a mark of
zero in this assessment.
Essay structure: this piece of coursework is in six parts (a), (b), (c), (d) and (e)
and (f). I would not expect students to adopt a ‘formal essay structure’ within
each part (i.e. introduction, outline, main body, conclusions) although
obviously the arguments within each part should have a logical flow and their
answer should be clearly stated.
The following sets out the main points I would expect to be covered in each part of
the question. I have indicated ‘the basics’ that should be covered in each answer and
also, recognising that students may take slightly different approaches to answering
questions, places where discretionary marks should be awarded. The points covered in
this marking guide are not necessarily exhaustive. Good answers to these questions
will be characterised by sophisticated understanding of the relevant theory; evidence
of the student having done some further reading (e.g. on the characteristics of the
demand for public transport) and an understanding of the way in which economic
models can be used to generate predictions/hypotheses that could then be tested on
‘real life’ data.
(a) Describe the factors that economic theory would suggest are likely to
determine the demand for journeys on the London Underground. [10 marks]
The answer should set out the independent variables that could be expected to
have an influence on the dependent variable, the demand for tube travel. Ideally,
this will be set out formally, e.g.
Dtube travel = f(Ptube travel, I, Ps, Pc, preferences, knowledge of risks…)
and will include reference to at least the following: price of tube travel, the
consumer’s income, the price of complementary goods, the price of substitute
goods, the consumers’ preferences regarding transport, their knowledge and
attitude toward risks, etc.
In each case, the variable should be described, and the direction (and magnitude)
of its expected affect on the demand for cigarettes discussed. Which goods are
substitutes (i.e. have a positive cross-price elasticity) to tube travel should be
noted (e.g. other public transport modes, such as buses, and private transport
options, including cycling and cars). It isn’t obvious what complements exist for
tube travel - maybe the newspapers, bottles of water, and confectionery sold at the
concession stands in some tube stations? These are likely to be fairly weak
complements though.
The effect of each variable on the position and slope of the demand curve should
be clear from the answer (i.e. an increase in price will move the consumer along
their demand curve, with the relative change in Q depending on their PeD; a
change in the other variables will affect the position of the demand curve),
whether demonstrated in diagrams or not.
Overall, the answer to (a) should clearly demonstrate that the student has mastered
the ‘basics’ of demand analysis. I fully expect (hope!) that most students will pick
up close to the full marks on this part. Students who have made some extra effort
to establish findings in the research literature on, for example, the relationship
between income and the demand for public transport (is it a necessity? A luxury
good?) should be rewarded with discretionary marks.
(b) Would you expect the demand for travel on the tube to be price elastic or
price inelastic? Why? What are the implications for London Underground
pricing and revenue? [20 marks]
The students’ answer should define PeD (% change in Q/%change in p) and what
constitutes price elastic (PeD >1) and price inelastic demand (PeD <1). Any diagrams
used (e.g., to show the difference between a price elastic and price inelastic demand
curve) should be clearly labelled and accurate.
The answer to the question should touch on the principal points raised in Sloman as to
what determines PeD: (a) number of closeness of substitute goods (b) the proportion
of income spent on the good (c) the time period (see p.46 of the 5th edition); in each
case relating them to pertinent characteristics of tube travel.
Award discretionary marks to students who have attempted to find and report
empirical research on PeD for tube travel or other public transport.
Award discretionary marks to students who have (either in part (b) or elsewhere)
located and reported statistics on passenger numbers on the London Underground
and/or prices BUT look for intelligent use of these: statistics, taken at face value,
show both prices and trips on the London Underground as increasing. Obviously,
ceteris paribus conditions do not apply – without controlling for changes in other
independent variables which are also changing over time (e.g. the increasing
population of London), not much can be inferred about the effect of price on demand.
Pricing and revenue: the answer here should be consistent with whatever the student
has predicted with respect to PeD. If the student has argued (or produced evidence)
that the PeD, in the short run at least, is inelastic, then this suggests that an increase in
price will also increase revenue. The answer should clearly explain the relationship
between the PeD along a demand curve, and the shape of the TR function.
(c) Would you expect the supply of tube travel to be price elastic or price
inelastic? Why?
[20 marks]
Sloman suggests that the determinants of PeS are: (i) the amount that costs rise as
output rises and (ii) time period (5th edition, p.53). These should be related to the
London underground. E.g. in the short run, it may be possible to increase supply by
adding more rolling stock (carriages) and/or increasing the frequency of trains. But
the ability to increase supply in this way depends on the spare capacity of the system
(i.e. the tube rail network) at present – and the ability to increase supply more
substantially is constrained by the existing number and length of the tube ‘lines’. To
increase supply beyond existing rail capacity would require massive investment in the
infrastructure itself e.g. by digging out and building new underground lines, and this
is both costly and takes time.
Any diagrams used (to show the difference between a price elastic and price inelastic
supply curve) should be clearly labelled and accurate.
(d) Explain, and use diagrams to show, the likely effect on demand and
market equilibrium of each of the following:
General points with regard to students’ use of diagrams in part (d):


Diagrams should be appropriately labelled
In addition to showing the affects on the position of the curves, new
equilibrium points and relevant areas within the diagram should be
marked and explained.
The diagrams and what they show need to be explained in the main text of the
essay.
(i) A specific terrorist threat to the tube system
[5 marks]
Demand curve would shift in (less is demanded at each and every price); the
extent of this shift being determined by peoples’ attitudes to risk. The new
equilibrium price and quantity traded would be lower.
Award discretionary marks for students who point out here, or elsewhere in
their answers, that in practice there is some rigidity or ‘stickiness’ in prices, as
these may be “set” at the beginning of the year for a given period of time (e.g.,
the current year); by the London Underground Corporation. It may not be
possible (or easy) (or cheap i.e. transactions costs) to change prices in
response to short-term fluctuations in demand and supply conditions. Indeed,
one approach to answering these questions would be to assume that, in the
short run, prices are effectively fixed – so changes in demand and supply
conditions will result in ‘shortages’ or ‘surpluses’, the effect depending on
existing spare capacity in the system.
(ii) The introduction of a congestion charge for London motorists
[5 marks]
The congestion charge increases the costs to motorists driving into the centre
of London – this is likely to (and indeed is intended to) reduce their demand
for car use, and increase the demand for public transport. Depending on how
sensitive motorists are to the congestion charge (e.g. the extent to which the
charge can be ‘passed on’ to employers or consumers), the cross price
elasticity of demand will be positive, indicating that cars and the tube are
substitutes in consumption. The demand curve for the tube will shift out (more
is demanded at each and every price); resulting in an increase in equilibrium
price and quantity traded.
(iii) An increase in bus fares
[5 marks]
Buses are also a substitute for tube travel – so an increase in bus fares will
reduce the quantity demanded of bus trips, but increase the demand for tube
travel, as consumers switch between the two. The demand curve for tube
travel will shift out (i.e. more will be demanded at each and every price);
resulting in a higher equilibrium price and quantity traded .
(iv) London wins the bid to host the next Olympics
[5 marks]
During the period of the Olympics, there would be an increase in demand for
tube travel – the demand curve would shift out (more is demanded at each and
every price). This would increase both the equilibrium price and quantity
traded.
However, as part of London’s build up to the Olympics, there may also be an
investment in the tube system, in an attempt to increase quality, efficiency and
supply (e.g. by improving existing lines, or putting additional lines in). If there
is a planned increase in supply, the supply curve would shift out (more is
supplied at each and every price). This would lower the equilibrium price, but
increase the equilibrium quantity.
The combination of the shift out in both demand and supply schedules would
result in an increase in quantity traded – but the overall effect on price depends
on the relative magnitude of each of the changes in demand and supply. Price
may either be higher, lower or the same as it was before both supply and
demand increased.
There may be more complex effects. For example, an increase in the quality
(e.g. reliability, cleanliness, safety) as opposed to the quantity, of tube travel,
would increase the demand for tube travel, as Londoners substitute away from
other forms of transport. And the planners’ response to the transport needs of
those visiting London for the Olympics might focus on increasing the supply
of alternative modes of transport e.g. buses, rail, muting both the demand and
supply effects suggested above.
(e) Is the London Underground a monopoly? Why/why not? [10 marks]
I am not looking for a ‘yes/no’ answer here, but rather evidence of the students
thinking about this critically. A monopoly is a single seller; barriers to entry allow
supernormal profits to be earned in the long run. The definition of the industry is the
crucial issue here. If the industry is defined as ‘tube travel’, then the London
Underground obviously has a monopoly. Although different private sector companies
run different ‘lines’, these lines do not compete on price, and are not generally
substitutes. However, there are substitutes in the form of other modes of transport, so
in this sense the underground is not a monopoly. Relevant questions include – how
close a substitutes are the other modes of transport? And how dominant is the tube in
the supply of commuter transport generally?
(f) Governments often subsidise public transport. Critically assess the
economic rationale for these subsidies.
[20 marks]
The rationale for subsidisation may include both efficiency and equity arguments.
Efficiency: subsidisation of public transport may be justified as a means of
correcting for the negative external effects imposed on society by the use of
private transport. E.g. pollution, congestion, accidents etc arising from the use of
cars. A good answer to this question will go further than this, by asking what
alternative means there might be of correcting these externalities, and the
merits/de-merits of each policy solution.
Award discretionary marks to students who provide a diagram showing the effect
of external costs on allocative efficiency; or the effect of a subsidy on demand.
Equity: it may be argued that transport should be affordable and accessible by all
persons, regardless of income. Thus, subsidising public transport ensures that
those on lower wages or outside the conventionally-defined workforce have an
affordable means of travel.
The following instructions were provided to students undertaking this
coursework…
…You are strongly advised to look at:

The criteria for marking coursework essays, at:
http://www.city.ac.uk/andy/teaching/ite/criteria.htm

The Economics Department’s grade descriptions, at:
http://www.city.ac.uk/economics/forms/gradedescriptions.html

Section 5 of the Part 1 Student Handbook, on Coursework and Examinations,
including the Coursework Charter
You must ensure that you include a word count at the beginning of your essay.
Your essay should indicate clearly, by sub-headings (a), (b) and (c), your answer
to each part of the question.
Your essay must contain a bibliography at the end, with full publication details,
and works referred to must be in the Name (date:page) format in the text of your
essay.
You must not commit plagiarism: students found to have copied from another
student’s work (or to have allowed their work to be copied), or from a textbook or
other source without attribution, will be given a mark of zero, and a statement will
be placed on their file explaining why they obtained a mark of zero on this
coursework.
RESOURCES
Want some background information on the economics of public transport and the
London Underground?
See Section 2.5 “Economic models” in Begg, D., Fischer, S., Dornbusch,
R. (2003) Economics 7th edition. Economic models are explained using the
London Underground as an example.
 The textbook by Sloman has a section on “Traffic congestion and urban
transport policies” which is relevant to part (f) of the set question.

An internet search will reveal a great deal of relevant material, such as…

Information on the economic model used by the Department of Transport
(DTTLR) to forecast demand for the tube and other modes of travel can be
found at:
http://www.addingitup.gov.uk/epc/dtlr/dtlr_o1r.cfm
http://www.addingitup.gov.uk/epc/dtlr/dtlr_o1t5r.cfm

Gilbert C.L; Jalilian, H. The Demand for Travel and for Travelcards on
London Regional Transport, Journal of Transport Economics and Policy
January 1991, Vol. 25(1): 3-30. [available as a pdf file]
This paper is very technical, and you will have difficulty understanding the
economic models. However, you may be able to pick up some points of
interest from the introduction and conclusions. The authors develop a joint
model for the demand for travel and the demand for travelcards. The
estimates are that demand for underground travel is inelastic while the demand
for bus travel is elastic. Simulation analysis attributes between one third and
one half of the rise in demand for underground travel in the period 1982-87 to
employment growth; and between one half and two thirds to the introduction
of travelcards.

Evidence on the cross price elasticity of the demand for London Underground
with respect to the price of petrol is reported by Acutt and Dodgson (1994)
(see http://dynamic.dotrs.gov.au/bte/tedb/pdf/table2D02.pdf)