Price Theory: Evaluating Tax Proposals for Singapore Taxi Industry

This report provides an analysis of the Singapore taxi industry concerning the Ministry of Transport's proposed tax systems: a $2.40 per trip tax and a $50,000 lump-sum tax. The analysis employs Cournot's duopoly model to assess the revenue implications of each approach. It considers the industry's inverse demand function and cost components, including driver wages, fuel costs, and corporate overheads, to determine marginal revenue and marginal cost equations. The report concludes that the per-trip tax generates higher revenue for the government compared to the lump-sum tax, making it the more financially viable option for funding road and bridge maintenance. The report suggests that the government could also set a maximum price for each trip to protect passengers' interests. This analysis supports informed decision-making by the Singapore government regarding tax structures for the taxi industry.

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

1PRICE THEORY
Briefing for the Taxi Industry Analysis in Singapore
Subject: Analysis on Singapore Taxi Industry for selecting appropriate tax
decision imposed by the Ministry of Transport
Prepared: (Student Name)
Core Message:
In Singapore, the Ministry of Transport proposes two types of tax systems where the
first proposal states about imposition of $2.40 as tax on per trip of taxi while the
second proposal states about imposition of an everyday lump-sum tax of $50000. In
the following sections, an industry analysis is conducted for understanding that
between these two tax systems, the Ministry of Singapore can choose the tax
imposed for per taxi trip because of its higher revenue compare to others.
Recommendations:
Principle recommendation:
The government can adopt the first approach of proposed tax system because of its
high return of revenue compare to other
Additional recommendation:
The Ministry of Transport can set a maximum level of price for each trip of taxi so that
the incidence of tax cannot hamper passenger’s interest
Key Information:
In this report, the Singapore taxi industry will be analysed based on the proposed
imposition of tax by the Ministry of Transport. In this context, the ministry has
suggested two systems, which two major taxi companies have denied to follow. The
chief reason for disapproving this system is that these two companies realise that the
tax burden can increase the price of each taxi trip further and this consequently can
decrease their number of passengers in future (Dube 2018). This is because the
ultimate of tax will be carried out by passengers. In this context, the following industry
analysis is conducted to help the Singapore government by stating that which one of
the given two tax approaches will be better of it (Tremblay and Tremblay 2017). The
analysis represents tax structure of the government through states that the first
approach will create more revenue compare to the second one in the context of
Cournot’s duopoly market (Yang, Wu and Wang 2017). The chief motive of the
government for imposing this tax system on taxi industry is to invest the money for
maintaining and developing conditions of roads and bridges across the city.
However, taxi industry opposes this approach to protect their business.
Financial Implications:
According to the first approach, the government decides to impose $2.40 for per trip
of taxi and it is observed that these companies can complete 34300 trips, based on
this price. Hence, the amount of revenue that can be generated from this taxi trip will
be $82320. On the contrary, the outcomes represent that after imposition of a lump-

2PRICE THEORY
sum tax, the government can earn revenue worth $70000 every day irrespective of
the number of taxis these two taxi companies provide in a particular day. In this
situation, every taxi company needs to pay $35000 as tax. Thus, it can be stated that
first approach can provide comparatively more revenue to the government.
To discuss the entire situation, the industry obtains its inverse demand function of
taxi along with costs of these two associated with their service. These components of
costs are wage and benefits that drivers receive, price of fuels, cost for wear-and-
tear, vehicle cost along with corporate overheads. Each cost for these two
companies are same except the wear and tear one. The cost for driver’s wage and
benefits accounts for $8 per trip where fuel cost accounts for $1.50 each trip.
Moreover, the corporate overheads accounts for $100000 per day. However, the cost
for wear and tear for Gold Trip Taxis is $3 for every trip while that for Dark Grey Cabs
is $4.50. In this situation, corporate overheads act as fixed cost while others are
considered as variable costs. By summing up these costs, the industry can obtain its
total cost for every company from which the report can draw its marginal cost
equation. From the given equation of inverse demand function, this report can obtain
its total revenue from which marginal revenue of these two companies can be
obtained. By equating marginal revenue and marginal cost equations, this company
can obtain its equilibrium amount of price and the number of trips that each taxi
company should provides to its passengers (Wang et al. 2018). The overall
calculation will follow Cournot’s model under duopoly. This type of oligopoly market
states that firms select the number of trips simultaneously so that each company can
decide the number of trips they can provide every day (Yan, Yang, Yin and Wan
2018). This model of competition tries to work efficiently for the given industry under
which two companies can take their decision regarding trips in advance of the
market.
Thus, with the help of financial analysis, the report can represent numeric outcomes
of these two approaches based on the given data. Through this discussion, the
government can select its appropriate tax structure for improving the condition of
road and bridges all over Singapore (Stiglitz and Rosengard 2015). This analysis has
the importance to provide correct information to the government, based on costs and
demands and proper mathematical calculation, based on the process of Cournot’s
model.

3PRICE THEORY
Attachment: Industry Analysis:
In taxi industry of Singapore follows all features of an oligopoly market and
consequently it can be stated Cournot competition exist in the market and
consequently this method will be used to determine the equilibrium price and
corresponding number of trip for every taxi company (Klastorin, Mamani and Zhou
2016). The following industry analysis will help the Singapore government to decide
that which one between these two can help it to earn comparatively more revenue for
tax (Silva, Hassani and Heravi 2018). The following analysis section has two parts:
notation and analysis.
Notation:
Q: total number of taxi trips provided by two companies every day into the market
P: Taxi fare for each trip charged by two companies
Total fixed Cost (TFC) = the cost that cannot be altered during short-run. In this
situation, corporate overhead represents this type of cost for both industries
Total variable costs (TVC) = this type of costs can be changed based on the
production process, where no production means no variable costs. In this situation,
driver wages and benefits, fuel and vehicle wear-and-tear show this type of costs for
these two companies of taxi
Total revenue (TR) = total number of taxi for each company available a day * price for
each trip of taxi
Marginal revenue (MR) = change in total revenue of every taxi company for each unit
of extra trip
Total cost (TC) = TFC + TVC, which means total production consists with total fixed
cost and total variable cost
Marginal cost (MC) = for each company, this cost implies change in total cost for an
extra unit of trip
Let, to represent Gold Top Taxis, subscript G is used after each notation while for
Dark Grey Cabs, D is used as notation.
The following list provides all notations for first company:
QG = Total number of taxis available for one day
TRG = Total revenue of Gold Top Taxis
MRG = Marginal revenue of Gold Top Taxis
TCG = Total cost of Gold Top Taxis
TFCG = Total fixed Cost of Gold Top Taxis
TVCG = Total variable costs of Gold Top Taxis
MCG= Marginal cost of Gold Top Taxis
For second company:
QD = Total number taxi provided service for one day by Dark Grey Cabs
TRD = Total revenue of Dark Grey Cabs
MRD = Marginal revenue of Dark Grey Cabs
TCD = Total cost of Dark Grey Cabs
TFCD = Total fixed Cost of Dark Grey Cabs

4PRICE THEORY
TVCD = Total variable costs of Dark Grey Cabs
MCD = Marginal cost of Dark Grey Cabs
Analysis:
In Singapore, the taxi industry has the following Inverse demand function:
P=50 – Q
1400
 P=50 – QG+QD
1400
For Gold Top Taxis:
TRG = P * QG
 TRG=50∗QG – QG
2 +C∗QD
1400
Hence, the marginal revenue is:
 MRG = 50 – 2∗QG +QD
1400
Total cost is :
TCG= TFCG + TVCG
 TCG = 100,000 + 12.50 QG
Thus, marginal cost is:
MCG = 12.50
Equating marginal revenue with marginal cost, the following outcome will be
obtained:
MRG= MCG
 50 – 2∗QG +QD
1400 =12.50
 2*QG+ QD = 52500
 QD= 52500 - 2*QG
For Dark Grey Cabs:
TRD = P * QD
 TRD = 50∗QD – (QG∗QD +QD
2 )
1400
Therefore, Marginal Revenue is:
MRD= 50 – QG+2 QD
1400
TCD= TFCD+ TVCD
 TCD = 100,000 + 14 QD
Hence, marginal cost is:
MCD = 14
Equating marginal revenue with marginal costs following outcome can be
obtained:
MRD = MCD

5PRICE THEORY
$25.5
$27.9
Price
Total taxiO
34300
Supply taxi
Demandtax
i
 50 – ( QG+2 QD )
1400 =14
 QG + 2 QD= 50400
 QG +2 ( 52500 – 2∗QG ) =50400
 QG +105000 – 4 QG =50400
 QG = 18200
 QD = 16100
Q = 18200 + 16100
 Q=34300
P=50 – 18200 – 16100
1400
 P = $25.5
Outcome from first approach:
The first approach states to impose $2.40 tax on every trip of taxi (Adachi and
Fabinger 2017). As a result, total amount of revenue generated by this method will be
$($34300 * 2.4) = $82320
Moreover, the price for each taxi trip will become:
P = $(25.5 + 2.4) = $27.9
Figure 2: Increase in price after imposition of first approach
Outcome from second approach:
The second approach states that government will impose a lump-sum tax worth
$35000 every day without considering the number of total taxi.
In this context, total revenue of the government in every day will be:
$(35000*2) = $70000

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Therefore, based on above two outcomes it can be stated that the Ministry of
Transport can select first approach, as the amount of revenue in this context is high
compare to the second one (Muñoz et al. 2017).

7PRICE THEORY
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