Evaluate whether the UK government should continue to provide free bus travel for all, some or no elderly people

AQA A-Level Economics Paper 1 June 2020 Insert

Use the extracts and your knowledge of economics to evaluate whether the UK government should continue to provide free bus travel for all, some or no elderly people. (25 marks)

• Paragraph 1
  • Argument: free provision of bus travel to avoid under-consumption
  • Diagram: positive consumption externalities
  • Evaluation: state provision cannot respond to excess demand
• Paragraph 2
  • Argument: price mechanism responds to changes in demand
  • Diagram: excess demand
  • Evaluation: bus travel only for those who are willing and able to pay

In a free market, price and quantity is determined by the forces of supply and demand. There is a question as to whether bus travel should be left to the free market or whether free provision is necessary.

On the one hand, there is an advantage to providing bus travel free of charge by the government to all elderly people. Bus travel is a merit good as it has positive externalities in consumption. This is because there are positive spillover effects when elderly people are able to use these services for travel. It encourages them to go out and remain active and social, which reduces the burden on the NHS, and also allows them to continue to contribute to the economy. If bus travel was left to market forces, these externalities would be ignored due to information failure and both consumers and producers acting in self-interest. So, there would be an under-consumption. The diagram below shows that a free market outcome results in an output of q1, whereas the social optimal is q*. The underconsumption results in a welfare loss shown by the shaded triangle. The government are able to correct this through subsidies and price caps, but also through state provision. According to their research of the socially optimal level of output as well as available funding, they would be able to provide free bus travel as close to q* as possible, thus reducing the welfare loss in the market for bus travel for elderly people. 

However, the disadvantage of providing all bus travel through the state is that of excess demand. The diagram below shows that when bus travel is state provided at a price of 0, there is an excess demand as there are more elderly people who wish to use bus travel compared to the amount the government are willing and able to provide. This means that there will always be queues, especially during rush hour, to get onto a bus, and many could be left without a seat. Additionally, as funding is used to provide as many journeys as possible, the government could take shortcuts and reduce the quality of their service, by reducing bus frequency or reducing how often buses are cleaned. Overall, this is an example of government failure as there is a distortion in the market. 

Therefore, there is an advantage of providing bus travel to the elderly through through the free market. The free market allocates resources through the three functions of the price mechanism, and this allows it to respond well to changes in demand or supply. Suppose there is an increase in demand in the free market, this information gets signalled to producers who raise prices. This incentivises producers to increase output, causing an expansion in supply and a contraction in demand. This causes the market to clear at a new, higher equilibrium quantity, as shown in the diagram below. In comparison, when bus travel is provided solely by local authorities, an increase in demand causes excess demand without raising quantity.

However, the disadvantage of leaving bus travel to the free market is that elderly people may be priced out, as the free market only allocates goods and services to those who are willing and able to pay the market price. Here, the incentive function of the price mechanism is working against the interest of society as it is actually encouraging elderly people to avoid using the bus due to high demand and high prices.

Overall, I believe that buses should be provided to all elderly people by the state in order to avoid the market failure caused through externalities, whilst also keeping bus travel equally accessible to all elderly people. 

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