City Bus Fare Revision: Reading Elasticity Before the Board Vote
A state-owned city bus corporation proposes to raise its flat fare from ₹20 to ₹24 from the next quarter. Its planning cell surveyed 2,000 peak-hour commuters and reported that daily ridership, currently 50,000, would fall to about 44,000 after the increase. The corporation's fuel bill has risen 22 per cent in a year and it lost ₹3.1 crore last year, so the board wants the fare rise to close the gap. Two facts were noted but not quantified: privately run shared auto-rickshaws charge ₹25 on the same corridor and have added 300 vehicles in eighteen months, and about 60 per cent of the corporation's ridership are daily-wage workers whose travel is not reimbursed. The transport department has also asked whether the monthly pass at ₹600, used by 8,000 commuters making about 50 trips a month, should stay unchanged. The board meets next week.
1. Calculate the price elasticity of demand implied by the survey and the effect of the fare rise on daily fare revenue. On these numbers, can the board expect the rise to close the ₹3.1 crore loss?
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Elasticity
- Percentage change in quantity: (44,000 − 50,000) ÷ 50,000 = −12%
- Percentage change in fare: (24 − 20) ÷ 20 = +20%
- PED = −12 ÷ 20 = −0.6
Since |−0.6| < 1, demand is inelastic over the ₹20–₹24 range, so a fare rise raises total fare revenue.
Revenue
| Before | After | |
|---|---|---|
| Fare | ₹20 | ₹24 |
| Daily riders | 50,000 | 44,000 |
| Daily fare revenue | ₹10,00,000 | ₹10,56,000 |
Gain = ₹56,000 a day ≈ ₹16.8 lakh a month ≈ ₹2.0 crore a year. Because the service runs to a schedule, fuel and crew costs fall very little when 6,000 riders leave, so most of the gain reaches contribution.
Judgement: ₹2.0 crore against a ₹3.1 crore loss covers roughly two-thirds of it - the fare rise narrows the gap but does not close it, so the board must pair it with cost action or non-fare revenue. Two caveats: the elasticity comes from a stated-preference survey of 2,000 commuters, not from observed behaviour, and it is a one-step estimate valid only between ₹20 and ₹24.
2. Assess the medium-term risk to the −0.6 estimate using cross elasticity of demand, and explain what the ₹600 monthly pass does to the revenue arithmetic.
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Cross elasticity. Shared auto-rickshaws are a substitute, so cross elasticity of demand is positive: a rise in the bus fare raises demand for autos. The relative price gap falls from ₹5 (₹25 − ₹20) to ₹1 (₹25 − ₹24). A one-rupee gap plus 300 extra auto vehicles means the switching response is likely to be much larger than the survey suggests, because the survey asked about bus fares in isolation. The realistic medium-term PED is therefore more elastic than −0.6, and if it exceeds −1 the revenue gain turns into a revenue loss.
The pass. ₹600 for about 50 trips is ₹12 a trip - a 40 per cent discount at today's fare and 50 per cent at the new one. Three consequences:
- 8,000 of the most frequent riders are insulated from the fare rise, so the projected loss of 6,000 riders cannot come from them; the survey may be double-counting the response.
- Pass revenue is fixed at ₹4.8 lakh a month regardless of fare, so the revenue gain rests entirely on the 42,000 cash-fare riders.
- The discount is where revenue leaks most, and it is given to the group least likely to switch to autos.
Judgement: the elasticity estimate is a floor on the loss of riders and a ceiling on the revenue gain; the board should treat the ₹2.0 crore as an optimistic case.
3. Recommend a pricing structure (uniform fare versus peak/off-peak, and the pass) that serves both the revenue gap and the public-service obligation. Justify each element.
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Recommendation - segment the price instead of applying one flat rise.
| Element | Proposal | Why |
|---|---|---|
| Base fare | Raise to ₹22, not ₹24 | Keeps a ₹3 gap below the ₹25 auto fare, protecting the inelastic core from switching |
| Peak premium | ₹2 surcharge on 8–10 a.m. and 5–8 p.m. | Peak commuters are the least elastic group; third-degree price discrimination extracts revenue where the response is smallest |
| Off-peak | Retain ₹20 or discount to ₹18 | Off-peak travel (shopping, leisure) is elastic; lower prices fill otherwise empty seats at near-zero marginal cost |
| Pass | Reprice to ₹750, or cap at 50 trips with an overage charge | ₹12 a trip is the deepest discount given to the least price-sensitive riders |
Reasoning. The uniform ₹24 treats a captive peak commuter and a discretionary off-peak rider as the same customer, which the elasticity evidence says they are not. Segmenting raises revenue from the inelastic segment and protects ridership in the elastic one.
Public-service obligation. With 60 per cent daily-wage riders whose travel is unreimbursed, an untargeted fare rise is regressive. A peak premium is defensible because formal-sector commuters usually travel at peak and can often claim reimbursement; concession passes for students and low-income workers should be retained and funded explicitly, not hidden inside a flat discount for all 8,000 pass holders.