Many proponents of public transit argue that the service should be provided free

Question

Many proponents of public transit argue that the service should be provided free to the public in metropolitan areas in order to reduce pollution and traffic congestion. Estimates by economists found the price elasticity of demand for public transit to be 0.17. The economists also found the cross-price elasticity of demand with the automobile to be 0.10.

What will free public transit mean to the use of the public transportation service?

What will free public transit mean to the use of the automobile?

Explanation / Answer

With a price elasticity less than 1, the price of public transit is fairly inelastic meaning that price changes will have negligible impact on demand.

In terms of cross elasticity, with cross elasticity of .10 which is relatively close to zero, this means that cars and public transit are relatively independent goods with a very small substitution effect. Meaning again that a change in price of public transit will have a negligible impact on automobile use.

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