Question

• Suppose Ankara city management provides free bus rides for every citizen.
  The marginal social cost of a bus ride is estimated to be 1 TL. Currently, city residents take

  50,000,000 rides per month in total. The costs of these rides are financed by a local tax on city residents.
  a. Draw a graph to show that the current monthly consumption of transportation is not efficient. b. Show the net gains in well-being possible by applying a user charge of 1 TL per ride to citizens.

  Assume that monthly consumption declines to 40,000,000 after the user charge is imposed. Calculate the tax revenues that can be freed each month (including a reduction in taxes to local residents) after the user charge is imposed.

Answer 1