Question

A well-operated mass transit system in North America is one that obtains at least half its total revenues through the fare box (passenger fares). The remaining revenues are obtained as subsidies from municipal, provincial and federal governments.

a) Draw and explain an appropriate economic model that illustrates the rational for subsidizing mass transit.

b) Subsidies can be given to the transit authority as a lump sum payment (with specific operating rules), or distributed on a per rider basis. Explain the difference in these two methods of payment, and give the advantages and disadvantages of each.

Answer 1

Answer:

(a) Explanation of an appropriate economic model that illustrates the rational for subsidizing mass transit :

According to Economic model a mass transit system is a system of large public transportation in a given metro channels like buses and subways e,t,c.

Economic model also states there will be some benefits by implementing mass transit are as follows :

a).Increase in fuel resources

b) Reduce in traffic problems

c) Increase in mobility

d) Increase in savings

e) Savings in expenditure

Hence, it is clear that mass transit plays an crucial  role in market with limited incomes.

(b) The difference in the two methods of payment, transit authority as a lump sum payment and the advantages and disadvantages of each are:

As per Lump sum payment, subsidies schemes will apply to loan with a tenure of up to 25 years.

The interest subsidy amount is not the difference amount regarding to interest amount of actual subsidy ratebut it will be the Net present value (NPV) of interest subsidy amount.

As per distributed per daily rider basis method, the interest amount is calculated on daily basis .