1. Suppose you are a transportation planner working for a large
city. You are charged with implementing a new bus system that
reduces emissions of particulates by 30%. This is predicted to
improve urban air quality from a level that is judged unsafe for
“vulnerable populations” to a level that is deemed safe for daily
exposure (using best available information). To fund this system,
the city is considering raising bus fares from $2.00 to $3.50 a
trip for all passengers. For simplicity, consider two groups of
people – urbanites and suburbanites. This city has not seen
extensive gentrification of its inner city and so urban residents
are typically poorer and more dependent on public transit compared
to relatively affluent suburban residents. However, the predominant
pattern is for both groups to predominately work in the city
center. The total monthly demand curve of each group for trips on
the bus system is P=30-.003*q for urbanites and P=50-.0005*q for
suburbanites.     

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Question: 1. Suppose you are a transportation planner working for a large city. You are charged with implem…
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A. Notice that both urbanites’ and suburbanites’ demand
functions have a “choke price”, a price above which zero trips are
taken. How can you explain this in light of the fact that
transportation is essential for individuals to conduct their lives
(to get to work, etc.)? (Hint: think about the price and
availability of substitutes.) Can you list factors that may affect
the shape of the demand curves?

B. Calculate the monthly consumer surplus for each group before
and after the rate increase. Your boss wants a measure of the
losses to each group from the rate increase. Obtain these measures
from your previous calculations (this should be simple) and explain
their meaning.

C. What is the minimal magnitude of benefits that must be
generated to suburban and urban residents in total from the
improved air quality in order to justify the new system as an
improvement relative to the status quo (assuming no spillover
benefits beyond these groups exist)?

D. Assume the benefits to
pollution reduction exceed the threshold you’ve found in part c.
Does it follow that
both
suburban and urban residents are
made better off by the policy change (i.e. was it a “win-win”
situation)? How do the scientific details of the “fate and
transport” of the reduced pollution (i.e. the spatial footprint of
pollution reductions) matter for answering this
question?

E. The transit authority is concerned about the effects of the
policy on total monthly ridership and fare revenues. Use the demand
curves for each group to calculate the percentage reductions in
ridership and fare revenues from the fare increases for each
group.

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