Many city governments provide transportation subsidies in the form of lowering the cost per ride on public transit (e.g. buses or trains) to lower traffic congestion. According to the model
Many city governments provide transportation subsidies in the form of lowering the cost per
ride on public transit (e.g. buses or trains) to lower traffic congestion. According to the model
in this class, which of the following statements may be true about this type of transportation
subsidy? Do not worry about the underlying facts of each statement, only whether it makes
economic sense given our model. (Select one or more.)
(a) Subsidies decrease the number of drivers because transit and driving are substitutes.
(b) Subsidies decrease the number of drivers because transit and driving are complements.
(c) A subsidy is identical to a binding in-kind transfer.
(d) The equivalent variation of a subsidy is greater than the cost of a bus/train trip.
(e) The equivalent variation of a subsidy is less than the same size lump-sum transfer.
(f) We can’t compute equivalent variation since congestion is an externality.
(g) Transportation subsidies target low-wealth people because transit is an inferior good.
(h) Transportation subsidies target low-wealth people because transit is a luxury good.
(i) The subsidies generate deadweight loss relative to a lump-sum transfer.
(j) We can’t compute deadweight loss since congestion is an externality.
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