Discuss whether subsidies alone are a sufficient policy to halt the decline in demand for local bus services

(20 marks) Recently, the demand for buses has been declining; many argue that this is due to the inconvenience and unreliability of bus services, high fares and substitutes like cars providing much more independence and flexibility within an extensive road network. A subsidy is a payment usually from the government to encourage consumption or production of a good or service. In the case of local bus services, subsidies can be used in many different ways to halt the decline for local bus services as shall be explored in the body of this essay. The government can subsidise non-profitable routes. Non-profitable routes involve loss-making services, for example in rural areas, as these services are usually very costly to run due to the low passenger numbers. This essentially means that at P1 and Q1, costs are higher than revenue (as shown in the left diagram below) therefore bus companies operate at a loss as they are not gaining enough revenue to cover their costs. As a result, bus companies do not have an incentive to operate these services.
Price MC Price AC MC AC

P1

LOSS

P1 AR=D Quantity Q1 MR Q1 MR Quantity

AR=D

If the government subsidise these services, it will cover more costs for a bus operator and therefore bus companies may decide to run these services as they will be more likely to either break-even or make normal profit (as shown above at P1 and Q1 in the right diagram). The government can also subsidise specific bus routes to make them cheaper. More local bus services operating on these newly subsidised routes and socially necessary services will lead to an increase in supply and therefore frequency on such routes. As a result, it should halt the decline in demand as consumers will recognize that buses are a more reliable convenient option. As buses are an inferior good and have a low, even negative income elasticity of demand, they are used mostly by low income groups, such as pensioners. The government can subsidise bus fares for pensioners and students, this will result in cheaper fares, from P* to P2 and also increase consumer surplus from area A to A+B. It will also increase the quantity demanded from Q* to Q2 and therefore halt the decline in demand for local bus services (as shown in the diagram below). The quality of bus services can also be subsidised, for example providing subsidies for new, more

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Discuss whether subsidies alone are a sufficient policy to halt the decline in demand for local bus services (20 marks) comfortable seats, which may enhance consumers desire to opt for taking a bus instead of other modes of transport and therefore increase demand for local bus services.
Price Original consumer surplus A P* P2 D Quantity Q* Q2 B Additional consumer surplus

However, there are many reasons why subsidies may not work. Firstly, it depends on the size of the subsidy a subsidy must be set at the right level; it must be high enough to cover costs so that bus companies do not operate at a loss. If it is not set at the right level, the supply of local bus services on certain routes or socially necessary services will not increase by as much as anticipated in order to halt the decline in demand for local bus services. The cross elasticity of demand for bus travel and car travel is positive, but rather low, and therefore indicates that they are weak substitutes. As a result, the anticipation of a subsidy increasing demand for local bus services may fail to materialise because cars are still a more convenient, flexible mode of travel and are inevitably superior to bus travel. As a result, those who prefer to use cars will most likely not switch to bus travel and therefore the decline in demand for local bus services will not be reduced by as much as intended. Not only this, but using a subsidy to lower bus fares to pensioners or students may not have an impact on their demand for two reasons. The first being that they are low income groups and most cannot afford to run a car, and therefore have limited choices of travel. As a result, as buses are the cheapest out of alternative modes of transport like cars and taxis, student and pensioners demand for bus travel is unlikely to be affected by any changes in bus fares. As long as bus fares stay below the prices of alternative modes of transport, their demand is unlikely to fluctuate as it is not elastic enough, hence demand may not increase by much. To further elaborate, pensioners and students already have many bus schemes available. For example, the National Bus Pass allows senior citizens and disabled people to benefit from cheaper prices. Also, an MK All in 1 card allows students below the age of 18 to benefit from discounts, which allow fares as cheap as 30p per journey. In addition, if you want to increase demand for local bus services more, then adult fares should be cut as they are very expensive at 2 a journey (Milton Keynes) this may give adults more of an incentive to use local bus services and hence increase demand to a bigger extent than just subsidising fares to those of lower income groups.

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Discuss whether subsidies alone are a sufficient policy to halt the decline in demand for local bus services (20 marks) Furthermore, perhaps a way of increasing demand for bus travel is to decrease demand for car travel. This may provide a greater increase in demand for bus travel as consumers will be forced to consider other modes of travel. A way of doing this could be to introduce road pricing. Road pricing is a system whereby road users pay a direct charge for the use they make of the road network. Another alternative would be to increase road tax or taxes on cars. Both road pricing and increasing tax on cars will increase the cost of running a car, this may led to a decrease in demand for driving a car/buying a car. As a result, consumers may opt for cheaper substitutes such as bus travel and hence the demand for bus travel would increase. In conclusion, subsidies can most definitely help with driving the costs down of operating bus services on non-profitable routes and therefore means that consumers who live, work and need to travel on these routes, their demand will increase. Subsidies could also lower fares for particular groups, however as previously mentioned if the government really wants to increase demand for local bus services, I do not think the fares should be subsidised for just low income groups. Using subsidies to enhance the quality of bus services and increase the comfort of seats etc, in my opinion, probably could increase demand slightly but cars are still more comfortable and factors of speed, reliability and convenience are still more achievable in cars. Therefore, based on the preceding arguments, subsidies alone are not a sufficient policy to halt the decline in demand for local bus services, as bus travel is an inferior mode of transport when compared to other alternatives. Subsidies would be more sufficient if combined with another policy therefore, the government should increase tax on cars. Furthermore, subsidies should be used to decrease the price for adult bus fares as adults mostly use cars and after increasing tax on cars, there will be a wider price gap between running a car and taking the bus. As a result, the decline in demand for local bus services should be halted.

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