Economic Analysis: Tax Proposals in the Taxi Industry Oligopoly Market

This report analyzes the taxi industry's oligopoly market, focusing on the economic impact of different tax proposals. The study examines a duopoly market structure, where two major companies, Gold Top Taxis and Dark Grey Cabs, dominate. The government aims to impose taxes to fund public works. The analysis employs Cournot's duopoly model to evaluate two tax approaches: a per-trip tax and a lump-sum tax. The report calculates the tax revenue generated by each proposal, considering the inverse demand function and cost structures of the companies. The findings suggest that a per-trip tax of $2.40 would yield higher revenue ($82,320) compared to a lump-sum tax ($70,000), which would result in an increased fare for the customers. The report recommends the per-trip tax as it provides greater financial feasibility for the government to fund public works projects.

Running head: PRICE THEORY
Price Theory
Name of the Student
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Author Note

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Title:
Subject:
Oligopoly market analysis in taxi industry for adopting best tax proposal
Prepared by:
Core Message:
The paper has tried to select tax approach that the government can impose on taxi
industry with the help of inverse function and costs of two companies. The report has
calculated tax revenue for comparing and selecting best tax policy in an oligopoly
market (Chang 2017). The readers can support the recommendation, as it can help
the government to earn revenue from taxi industry that can be used further for
maintaining bridges.
Recommendations:
Principle Recommendation:
The government can charge $2.40 as tax for every taxi trip, as it will provide more
tax revenue
Additional Recommendation:
The government may take immediate initiative regarding public work, repairing as
well as upgrading bridges across the city after imposition of tax.
Key Information:
The taxi industry follows duopoly market structure because only two taxi companies,
which are, Gold Top Taxis and Dark Grey Cabs have captured the entire market and
have possessed strong competition between them. The government intends to
undertake various program related to public works along with repairing and
upgrading of bridges across the city and for this, a decision regarding imposition of
tax on taxi industry has been proposed (Yang, Wu and Wang 2017). The
government has selected this specified industry because well maintained roads as
well as bridges could help taxi industry and passengers to earn higher benefit.
Consequently, this positive externality can further compensate increasing taxi fare of
the government.
The report has analysed the amount of tax revenue, based on the concept of
Cournot’s duopoly market. Through analysis, it can be observed that thee given first
proposal can help the government to earn $82320 while from the second approach,
the government can earn only $70000. Both taxi companies same inverse demand
function and same cost structure while the only difference can be observed in vehicle
wear-and-tear costs. This cost difference actually represents that
Financial Implications:
To analyse statement of the company it is essential to describe about various costs
that a company bears. Chief costs of taxi industry are wages and benefits of drivers,
fuel prices, wear-and-tear cost of vehicle and corporate overheads. Except, wear-
and-tear costs, others are same for both industries. Cost of wages as well as
benefits of drivers accounts as $8 per trip while fuel cost is $1.50 per trip and
corporate overheads as $100000 per day. Vehicle wear-and-tear costs of Gold Trip
Taxis are $3 per trip while that of Dark Grey Cabs is $4.50. Corporate overheads are

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considered as fixed cost while others are taken as variable ones. Through adding up
these two types of costs, the report receives total cost of each taxi companies.
Moreover, the report multiplies the inverse demand functions of this industry with the
number of total taxi that firm supplies every day to obtain total revenue of the
industry. From total cost and total revenue curve of industry, the report obtains
marginal revenue and marginal cost curves. By equating these two equations, the
industry obtains the price that each passenger wants to give for per unit of travel. As
two companies are operating in market, total number of taxis is divided into two
parts, which are, QA and QB.
Total taxi numbers of these two companies are 18200 and 16100, respectively. Per
trip taxi fare of each company is $25.5, which will increase further after levying tax on
taxi industry. Due to first proposal, taxi fare for every trip will become $27.9 and
consequently, the government can earn revenue from taxi industry worth $82320. If
the second approach considered than the government will earn revenue worth
$70000. According to this financial analysis, it can be said that the government can
adopt first approach of tax for undertaking a large public works program along with
upgrading and repairing of bridges across the city. These two tax systems will
increase taxi price for every trip and consequently taxi passengers will pay higher
prices for their every taxi trip compare to before. Moreover, the first is economically
feasible as it imposes tax only the number of taxis that are available in market for
each day. Hence, this amount can vary every day (Gascón et al. 2017). On the
contrary, lump sum tax imposes comparatively more burden on these two
companies, as it is fixed by nature. Hence, the company may provide comparatively
higher price than required.

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Industry Analysis:
 Two chief taxi companies are: Gold Top Taxis and Dark Grey Cabs
 The taxi industry operates under duopoly market
 Two firms operate the entire market
Figure 1: Cournot's duopoly market
Notation:
 The inverse demand function of entire taxi industry is:
P = 50 – Q/1400, where
 P = price of a taxi trip
 Q = Total number of taxi
 Total fixed Cost (TFC) includes Corporate overhead
 Total variable costs (TVC) includes driver wages and benefits, fuel and
vehicle wear-and-tear
 Total revenue (TR) = total number of taxi * price for each taxi
 Marginal revenue (MR) represents percentage change in total revenue due to
1% change in total output
 Total cost (TC) = TFC + TVC
 marginal cost (MC) represents percentage change in total cost due to 1%
percentage change in total output
Let, Gold Top Taxis is denoted by subscript A and Dark Grey Cabs by B.
All notations for Gold Top Taxis:
 QA = Total number of its taxi
 TRA = Total revenue
 MRA = Marginal revenue
 TFCA = Total fixed Cost
 TVCA = Total variable costs
 TCA = Total cost
 MCA = Marginal cost
All notations for Dark Grey Cabs:
 QB = Total number of its taxi
 TRB = Total revenue
 MRB = Marginal revenue
 TFCB = Total fixed Cost
 TVCB = Total variable costs
 TCB = Total cost
 MCB = Marginal cost
Analysis:

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P = 50 – Q/1400 P = 50 – (QA + QB)/1400
For first company:
TRA = P * QA TRA = 50 * QA – (QA2 + C * QB)/1400 MRA = 50 – (2*QA + QB)/ 1400
TCA = TFCA + TVCA TCA = 100,000 + 12.50 QA
MCA = 12.50
MRA = MCA 50 – (2*QA + QB)/ 1400 = 12.50 2*QA + QB = 52500 QB = 52500 - 2*QA
For second company:
TRB = P * QB TRB = 50* QB – (QA* QB + QB2) / 1400
MRB = 50 – (QA+ 2 QB)/ 1400
TCB = TFCB + TVCB TCB = 100,000 + 14 QB
MCB = 14
MRB = MCB 50 – (QA + 2 QB) / 1400 = 14 QA + 2 QB = 50400 QA + 2 (52500 - 2*QA) = 50400 QA + 105000 – 4 QA = 50400 QA = 18200 QB = 16100
Q = 18200 + 16100 Q=34300
P = 50 – (18200 – 16100)/ 1400 P = $25.5
First Approach:
The first proposal is related with tax imposition of $2.40 for each taxi trip
Total tax revenue of government will be $34300 * 2.4 = $82320
P = $(25.5 + 2.4) = $27.9

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$25.5
$27.9
Price
Total taxiO 34300
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Second Approach:
In second approach, the government intends to impose a lump-sum tax worth
$35000 for every day, irrespective o the number of total taxi trips
Total tax revenue of government will be $35000*2 = $70000
Hence, first approach of tax will be profitable for government.
Figure 2: Impact of tax imposition

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Yang, T., Wu, J. and Wang, J., 2017. Duopoly Competition Between Chauffeured
Car and Taxi: An Analysis of Pricing and Market Segmentation. Journal of Systems
Science and Information, 5(6), pp.511-523.
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