CHAN, Annika Kay B.

LAGARDE, Allison June M.

Firm Theory: Government wants to defer MRT, LRT fare
hike
http://www.rappler.com/business/industries/208-infrastructure/48645-govt-to-defer-mrt-lrt-fare-hike
Summary:
The Aquino administration has deferred the P10 increase for the LRT and MRT lines.
During June last year, the proposed P10 increase for all the 3 lines have been approved by the
Light Rail Authority Transit. The administration planned two consecutive increases instead of
one: P5 during 2013 and P5 during this year. However, during December last year, it was strong
opposed by the consumers due to the record-high rate hike by Meralco. For now, the proposed
P10 increase is deferred indefinitely.

Topics to be discussed:

1. Subsidy
2. Market Failure
3. Deadweight loss






Chan, Annika Kay
Lagarde, Allison June
EC111 - F
Dr. Aleta Domdom

Firm Theory: An Analysis of the Deferred LRT/MRT P10 hike
Ever since its creation and implementation, the LRT/MRT lines have been one of the
most used public transportation in the Philippines due to its inexpensiveness and effective time
reduction or efficiency. LRT Line 1 (LRT 1) first opened and began its operation in 1984 and it
was followed by the Metrostar Express (MRT/MRT 3) which began its operation in 1999. The
last and the newest operating addition to the the lines was the Megatren (MRT Line 2/LRT 2)
which began its operation in 2004. The two LRTs have a daily ridership of 2.8 million as of
20013 while the MRT had a daily ridership of 650,000 of the same year. The fare of the three
lines from end to end is P15. According to an article in Rappler, the government is shouldering
P45 for the MRT and P25 for the LRT.
Public transportation is considered to be one of the most crucial utilities used by the
mass majority. It is usually utilized by citizens who either do not own private vehicles or find it
more convenient and cheaper to avail of its service. In the Philippine setting, however, most
people use this mode of transportation because given the average Filipinos budget, most would
not be able to afford a luxurious mode of transportation thus the majority resort to the utilization
of the MRT and/or LRT. Aside from the Filipino budget, the utilization of the LRT/MRT is due
to the avoidance of the horrible traffic congestions that happen on a daily basis. In short, the
LRT/MRT lines are used due to its inexpensiveness, the efficient time reduction and to avoid
traffic congestion as well.
This paper will then follow a simple yet comprehensive detailed analysis of the article. It
will tackle the article on a fluid motion ranging from the what, why and who.
A. Subsidies

Aquino said the fare hike is needed to cut government subsidies for the train lines.
Subsidies are treated as negative tax and by this statement, we can say that the both the
buyer and the seller benefit from this government policy. Subsidies are a way to address the
deadweight loss created by the market. In this case, the government has been shouldering fees
that is why the current fares are low. However, the proposed hike will lower the subsidies used
for the tickets by the government in order to address other rail agendas such as maintenance and
other public goods and/or services.
It is important to keep in mind though that people pay for taxes and that subsidies come
from the money collected and aggregated by taxes outside the LRT/MRT transportation system.
Also, it is important to note that due to the huge number of daily ridership of the said
transportation, it can be inferred that the LRT and the MRT lines are inelastic goods. Henceforth,
it may be a reason as to why the consumers are sensitive to such increase.
B. Market Failure
so as not to burden consumers who are reeling from fuel and electricity price hikes.
Market failure is often signalled by two things: 1. Externalities and 2. Lack of
information. Market failure, more often than not, is defined by the inefficient allocation of goods
and services by a free market. In this article, however, it is important to use the general meaning
of the market failure in a way that there will be an inefficient allocation of resources in the
market if the price hike is implemented. This is because the optimal choice will be out of the
budget line of the consumer. We also have to remember that we can derive the market demand
from the consumption line of a consumer and thus, it will be the same for everyone else who is
using the LRT/MRT lines.
C. Deadweight loss
This will free up more funds that may be used for the maintenance of the railway systems, and
for government social services.
Due to the fact that there is a market failure, it is then safe to assume that there is a
deadweight loss. A deadweight loss results from inefficiency of price controls or the loss of the
producer surplus is far greater than their gain from the consumers. Due to the fact that there is a
market failure, there is inefficiency in price control. Also, due to the presence of subsidies, it also
connotes a deadweight loss because subsidies are collected by consumers in the sense that, for
example, the government is subsidizing P45 and instead of P60, the consumer only pays P15. So,
in a way, the consumers collect the P45 subsidy of the government. In this article, however, the
government is pushing for a lesser subsidy for the LRT/MRT to allocate the substantial amount
that would supposed to be a part of the original subsidy to the maintenance of the railways
systems and other social services
Conclusion
This article embodied and manifested some important topics in Chapter 9. Three topics
that stood out were: 1. the article implied that there was a market failure 2. Due to this market
failure, there was a deadweight loss and 3. The government handled the deadweight loss by
subsidies. However, in lieu of the topics that were discussed during the discourse, the
government had intended to increase the ticket fares and thereby effectively reducing the
subsidies it had intended for support of the passengers. Furthermore, this proposal was turned
down by the consumers because it will lower the consumer surplus they have been enjoying.
Lastly, the topic showed the reason why the price hike was deferred and why it was
deferred. To synthesize, the government had intended for the price hike to happen in order to
lessen the subsidies it reserve for the public transportation. However, the consumers were
outraged because not only there was a fuel price hike, Meralco also have imposed a record-high
rate for electricity during those months. LRT/MRT has become an important commodity
especially to those people who have no transportation they can call their own. In short, the price
of the LRT/MRT ticket fares will be deferred until the existing problems such as inefficient
allocation in the governments part will be resolved.