Question

5. At certain times of the day, commuter buses are extremely crowded, but at other times they are nearly empty. a. What sort of externalities exist in this situation? (Hint: Something to do with the choices of bus riders.) b. How might government (which operates the buses) make the outcome more efficient? Assume that the number of buses will remain the same at all times of the day.

Answer 1

• Crowded buses create negative externality for buses as well as passengers.
  • As it create additional cost of repairing buses more frequently now.
  • And create additional cost of suffocation and congestion to passemger.
• Similarly empty buses create positive externality.
  • But government cost per passenger is higher. Since number of passenger are lower than actual capacity
• Thus to optimise it's revenue, government need to balance the 2 above situation. This can be done by -
  • Increasing the ticket price in congestion hours. This will reduce the number passengers who are not in dire need.
  • Decreasing the ticket price in non congestion hours. This will transfer some of the passengers from congested buses to empty one.