Price Theory: Assessing New Tax System Impact on Taxi Services

This report analyzes the potential impact of introducing a new tax system on taxi services, focusing on two proposals: a $2.40 tax per taxi trip and a lump sum tax of $35,000 per day. It uses price theory and industry analysis to assess the effects on consumers and taxi companies. The report suggests that a $2.40 tax could disproportionately affect consumers by increasing fares and reducing demand, potentially creating a gap between the rich and the poor. It recommends government intervention through price controls to ensure affordability and reduce income inequality. Alternatively, the report suggests that a $35,000 lump sum tax would have a lesser impact on consumers, allowing companies to adjust prices based on routes and demand. The analysis uses qualitative methods, observation forms, and the benefit theory of taxation to evaluate the effectiveness of each proposal in generating revenue while considering the economic effects on both consumers and taxi companies. Desklib offers more solved assignments and past papers for students.

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Price theory
By (Name)
Course
Instructor’s Name
Institutional Affiliation
The City and State
The Date

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Briefing for the introduction of new tax system
Under here there is a summary of the industry analysis with some recommendations to
the minister of works. The introduction of the new tax system may not necessary generate
revenues needed in the construction of public works if not well imposed. For example,
imposing a tax of $2.400 would directly affect the consumers which will reduce their demand
for the taxis services (Mankiw and Taylor 2011).
Core message
Meaning only the taxi companies are capable of pushing this tax into the consumers in
form of high taxi fares. Only the rich people would be able to access the services(Mankiw and
Taylor 2011). This would imply that only the rich would afford to pay for the transport fairs.
The system though creates a big gap between the rich and the poor as these find it hard for the
transport prices (Mankiw and Taylor 2011).
Recommendations
The government therefore is encouraged to intervene in the market if it is to use this
approach. Intervention by the government would reduce the price at which the taxi companies
would charge the consumers (Mankiw and Taylor 2011).
Therefore, under this proposal of levying a tax at $2.400, I would recommend the
minister to put price levels for different routes used by these taxi companies. This would
enable all consumers to use the taxi at their affordable prices. It will also reduce the income
inequality which would be looked at as segregating the rich from the poor.
Hence, I would recommend the minister to allow the companies charge different
prices for different routes at different time (Pettinger 2011).
Key information.

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However, government intervention may not fully reduce the price to be afforded by all
the consumers but at least many of them may afford the price under its control(Mankiw and
Taylor 2011). Not all the customers would benefit from the government intervention since
some may look extremely poor. When the tax is imposed onto the taxi companies, demand for
the taxi would reduce since the consumers would anticipate these companies to react by
increasing the prices(Mankiw and Taylor 2011). In this case, I would recommend the minister
to also introduce some public means for which to charge a relatively lower price. In such a
case, all consumers would be catered for and revenues will be high since all customers are
willing to pay for the service they wish to use. The idea encourages consumers to choose the
type of taxi service that is best for them (Mankiw and Taylor 2011).
Financial implications
On the other hand, introduction of a $35000 tax has a little impact on the consumers
and companies of the taxis. For example, this would allow the taxis to make as many trips as
they can so as to generate enough profits. The approach allows both companies to charge
different prices which gives consumers an upper hand of choosing the best option. It implies
that there are likely to be different prices for different routes depending on the number of
customers available(Mankiw and Taylor 2011).

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Attachment: Industry Analysis
In the analysis different approaches were used where the benefit theory of
taxation was used to give more realistic results (Pettinger 2011). The
qualitative method of analysis with observation forms are used in the analysis.
It is a good theory because it argues that, government officials should always
impose the taxes according to the benefits derived from the revenue collected.
Thus tax payers should be taxed according to the services provided.
Notation
P1 – price of the Gold taxis
P1 – price of Grey taxis
S1 – supply for Grey taxis
S1 – supply of Gold taxis
Dd – demand curve for the Gold taxi
Dd – demand curve of the Grey taxis
Analysis
When developing the policy plans by the government concerning public
works, Ministry of works however, has to lay strategies that will help in
overcoming the policy laid out by the government officials. In this analysis,
more emphasis is put on how introduction of the new tax can be effective in
generating revenues. In the process, two proposals such as levying of a $2.400
tax per taxi trip and paying a lump sum of tax of $35000.0 per each day of the
week were all put by the government (Varian, 2010).
The theory suggests that as more services are being provided by the
government for public use, the higher the users should pay in terms of the tax.

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However, using the first proposal of levying a tax of $2.400 to the taxi
companies in its analysis gives the following results. Introduction of the tax
could cause a direct affect onto the consumers of the taxi.
Figure 1.1 below shows the tax incidence of the consumer (buyer) (Pettinger
2011).
However, if any of company of them charges a different price, the
market equilibrium will shift to a new position. For example, if the gold top
taxi company charges the same price as the tax imposed on them, the total cost
would be higher than the revenues generated. In that case the company will
increase the price above its marginal cost curve to recover the costs
incurred(Varian, 2010). While the Dark grey taxis company on the first place
will change by a slight increase in its original price. Its revenues will equal to
the marginal cost hence not sufficient to remain in the market (Khan 2014).
From the inverse demand, when the tax is imposed to the Gold taxis,
the same tax is used as the price. In which the quantity demanded can be
calculated in both companies (Varian 2010).
Using; P = 50 – Q/1400
Q = (50 – p) * 1400
Since p = $2.400 then, the quantity demanded becomes;

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Q = (50 – 2.4) *1400
Q = 66640 customers. Then multiplying by price gives the total income
as;
Income = 66640 * 2.400 (Khan 2014).
= 159936.
Total costs incurred per trip = 8 + 1.5 + 3 + 100,000 = 100012.5.
Therefore, the total profits = income – costs
Profit = 1599936 – 100012.5 = 59923.5 as the profits per trip for Gold
tax.
Total costs = 8 + 1.5 + 4.5 + 100,000 = 100014. The total profits =
1599936 – 100014 = 1499922 as the profits earned by grey taxis. By
comparison, Grey would earn more profits per day if all companies charge the
same price (Khan 2014).
On the other hand, paying a lump sum of $35000 tax each day is also
associated with economic effects. For example, both companies will be forced
to charge different prices in case the agreement between them is not reached.
This will force consumers to go for a low-price taxi (Khan 2014).
Figure 1.2 shows the tax burden of the taxi companies charging different
prices

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The figure above demonstrates the original tax for both companies is at
$35000.0 per trip. Where S1 and S0 are the original supply curves for Grey and
Gold taxis respectively. The supply curves for the two companies will shift to
the left and upwards due to introduction of the tax. The customers pay P1 and
P1 for gold and grey taxis respectively. Beyond that, the companies enjoy the
profits after the taxes have been paid (Mankiw and Taylor 2011).
S1
S2 S0
P1
Price
35000.0
Q0
B
A
Dd
Dd
P1
35000.0
C
Q2 Q1 Q1
S1

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References
Khan, A.2014. "Managerial Economics and Economic Analysis", 3rd edition,
Pakistan
Pettinger, T. 2011. Price Mechanism in the Long Term. In Economics Help.
Retrieved April 10, 2011, from
http://www.economicshelp.org/microessays/equilibrium/price-mechanism-
long-term.html
Mankiw, N.G.; Taylor, M.P. 2011. Economics (2nd ed., revised ed.). Andover:
Cengage Learning.
Varian, H.R.2010. Intermediate microeconomics: a modern approach. New
York, NY: W.W. Norton & Co.

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