Archive for October 23, 2012

Bus Fares

Any one of you people reading this – if you lived in a city, you probably used the means of public transport at least once. It sometimes might not be the top notch quality we’d wish for, but it’s there. And it works. Well, if we don’t count all the times you really needed to be at work or school on time and your bus broke down.

But as everything in this world, public transport does not come free. You’d think that by buying the bus tickets for your everyday journey, the government covers the cost of transportation. But it turns out that this is quite rarely the situation. As an example in my home city, the revenue from ticket sales covers only about 30% of the total costs of running public transport. In Michigan, the bus fares only cover about 20%!

So we might ask, why does the government run such a “business” if it doesn’t make any money? And who pays for running it?

Well, the answer to who’s paying the government is always us – the taxpayers.

 

But the answer for the firs question is a bit more complex.From an economists point of view, the main reason why governments invest into public transport is because of the positive externalities it brings to the society. A positive externality that coomes from provision of public transports are basically the benefits that the community gains from public transport.

The following diagram shows this situation. The MPB(=Marginal Private Benefit , that the government earns is represented by the MPB curve on the diagram. Above it is the MSB = Marginal Social Benefit, that is the gains that the entire society has from the governments actions. As we can see, the MSB is above the MPB, which means that as much as the government does not earn revenues from providing communication, the society gains, which contributes to growth and development. The MPC represent the Marginal Private Cost – so how much costs the government takes to provide the service. It is the same as the Marginal Social Cost, as bus fares do not really harm the society in any way ( one would argue pollution, but that is a very minor contributor in this case). 

Sop despite the government making “losses” on the bus business, it actually proves beneficial to the society, as it improves the communication in a city which makes the economy more efficient. Governments realize the benefits of these kinds of actions, which is why in some cities bus fares are only history. It is said that removing bus fares could actually cause more profit that charging for tickets.

In my opinion – free transportation is the way to go. Not only because i don’t like paying for my duty to go to school, as I usually have my ticket paid in full. It’s just in some situations I usally just happen to be the unlucky one to have my subscription ticket just expired the day before…

 

The Cola Battles

I won’t Lie: I love Cola. But every time i go to the corner store to get myself a bottle (or can, whatever floats your boat), I always have a problem of choice. One would say: “Whatever cola you choose, it’s still the same!”. But whenever i stand in front of the soft drink fridge in my local store i always have the dilemma: Coca-Cola or Pepsi?

It is rarely any of the other brands in the store, that take up 90% of space on soda beverage shelves. Don’t forget that Coca-Cola also owns a variety of other beverages than only cola such as: Sprite, Fanta, Minute Maid [=or Cappy as known in Poland], Nestea or Powerade. But Pepsi also engaged in the “Cola War” follows the competitor step by step with beverages such as : 7up, Mirinda, Lipton Ice Tea, Mountain Dew or Gatorade. Of course, there are some other producers in the market, but generally speaking , almost the entire market belongs to these two companies.

This is a situation of Oligopoly- where only a few firms have msot of the market share. Some argue that in certain markets Coca-Cola and Pepsi are a duopoly, where only two firms control the market.

 

The firm in Oligopoly sets the Price ant P1 since any alteration of the price, proves to be destructive for the firm. If Coca-Cola and PepsiCo started a pricewar, they would undercut eachoter’s profits. If one of the companies raised it’s prices, It would lose markte share as they would switch to the other.

This is why companies such as Coca-Cola and PepsiCo, tend to gain customers by non-price competition. Remember the Pepsi Generation featuring Michael Jackson? The animated Coca-Cola commercail, which evolved into a short-movie? What is more, recently, Coca-Cola is recently reviving a masala (an Indian mixture of spices) flavoured cola “RimZim”.

But who is winning the war?

There is not one answer to the question. As of 2010 for example, in the United States – Coca-Cola had 42% of the carbonated beverages as opposed to PepsiCo’s 29.3%, but as a matter of fact, the winner in India is definately Pepsi. What is more, as much as the Hoover(brand name) is the word for a Vacuum Cleaner in the UK, the word “Pepsi” is the indian word for cola.

Despite the differnce in the taste of both beverages: I have no specific favorite in Soda drinks which is why i simply bought one of each to take home today.

 

Sources:

http://online.wsj.com/article/SB10001424052748703818204576206653259805970.html

http://www.dineshbakshi.com/ib-economics/microeconomics/161-revision-notes/1771-oligopoly

http://en.wikipedia.org/wiki/Cola_Wars

http://www.dineshbakshi.com/as-a-level-economics/price-system-theory-of-firm/119-revision-notes/1776-oligopoly

Bloomber Businessweek, Issue 38/12