Chapter Elasticity: A Measure of Response Start Up: Raise Fares? Lower Fares? What’s a Public Transit Manager To Do? Imagine that you are the manager of the public transportation system for a large metropolitan area Operating costs for the system have soared in the last few years, and you are under pressure to boost revenues What you do? An obvious choice would be to raise fares That will make your customers angry, but at least it will generate the extra revenue you need—or will it? The law of demand says that raising fares will reduce the number of passengers riding on your system If the number of passengers falls only a little, then the higher fares that your remaining passengers are paying might produce the higher revenues you need But what if the number of passengers falls by so much that your higher fares actually reduce your revenues? If that happens, you will have made your customers mad and your financial problem worse! Maybe you should recommend lower fares After all, the law of demand also says that lower fares will increase the number of passengers Having more people use the public transportation system could more than offset a lower fare you collect from each person But it might not What will you do? Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 230