Saturday, June 21, 2008

Price mechanism is free bird Kinemics by Chandra

It is the price kinemics that determine the individuals to indulge particular service or any other viable necessities. Here is an economist who gently explains the basic principle of price kinemics.
Consequently, the functions of price mechanism in both private goods and public goods is not perfect, the later is inefficient ends with poor quality of service and the farmer is efficient as the natural right to keep safe and productive with more care.
The interesting paragraphs to grasp quickly:

“In order to reduce the possible negative impact of increasing fuel price on economic welfare of the people, the Union finance minister advised the public to utilise public transportation system (PTS) as an alternative means of transportation.

The advice on switching over to PTS is based on the assumption that the PTS is a ‘perfect’ substitute for private mode of transportation. However, in many cases the PTS and the private mode of transportation are not perfect substitutes to each other.

Another fundamental economic issue to be addressed in the wake of the above piece of advice is that at what level of fuel price, the owners of private vehicles will switch over to PTS? Simple economic principle says that costs and benefits of both private mode of travel as well as travel by the PTS will have to guide the commuters’ decision to opt for either of the systems.
More precisely, a commuter will switch over to the PTS only if the relative cost of travel in PTS is lower than that of the private mode of travel, when there is a change in the price of fuel. Let me take my own case. I have got a two-wheeler, which is my private mode of travel. Every day I have to travel eight kilometres up and down to work. At the fuel efficiency of 60 kilometres per litre, I can make six
trips at the cost of Rs 55 (at today’s petrol price in Chennai).
However, if I travel by the PTS I could make approximately four trips with the same amount (@ Rs. 14 per trip). On the basis of direct cost of travel, the economics of private mode of travel still works out to be ‘relatively’ cheaper. But, if I travel by ‘low fare bus’, at Rs 7 per trip, then I could make eight trips which works out better than the private mode of travel. Unfortunately, this option is ruled out because of ‘inequitable’ distribution of the low-fare services, especially during peak hours. In addition to the direct cost, there are indirect costs involved in travelling in the PTS, such as, opportunity cost of extended travel time, psychological costs due to congested travel and breakdowns, etc. Even though concessions on season tickets may reduce the burden of the direct cost, it is these ‘indirect costs’ that make the PTS less preferable. Taking into account all kinds of costs, the PTS becomes more costly than the private mode of travel. Simple economics says that even with the current increase in the petrol price owners of private vehicles, like me, will not switch over to the PTS permanently. So, the advice of the finance minister will be taken seriously only when the PTS is strengthened by inducting more number of low-fare but high quality services, apart from other measures”.
Read full article here.

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