Read the information below about a private bus company. The firm wants to stop its least profitable rural route. Residents argue that the route enables work...

(a) A private benefit is received directly by the firm. Fare revenue is a valid answer because passengers pay the bus company for journeys. Profit would also be valid. [1]

(b) External benefits are benefits received by third parties rather than the buyer or seller. Two valid benefits are:

• workers can reach employment;
• older residents can attend medical appointments.

Reduced social isolation, fewer car journeys and less congestion would also gain credit. [2]

(c) The firm's loss measures private costs and private revenue, not all effects on society. The route creates external benefits for other people, such as employers gaining access to workers and residents gaining healthcare access. If these wider social benefits exceed the firm's private loss, or exceed the social cost of providing the route, keeping it running is socially worthwhile. [2]

(d) A subsidy reduces the firm's effective operating cost, or increases the revenue it receives for each journey. This makes the firm willing to supply more bus services, including continuing the rural route. If the subsidy is passed on through lower fares, passengers face a lower price and quantity demanded for rural bus journeys rises. [3]

(e) A subsidy may maintain a service with substantial external benefits, but it is not automatically the best policy. Its suitability depends on the size of those external benefits and whether a lower-cost alternative, such as community transport, could provide the service. [1]

Exam focus: distinguish the firm's private revenue from benefits received by other people when deciding whether a loss-making service may still be socially beneficial.