Econ1056, Semester 2: Price Theory Analysis of Singapore Taxi Industry

This report provides a comprehensive analysis of the Singapore taxi industry, focusing on the application of price theory to evaluate the potential impact of different revenue-generating tax policies. The analysis centers on a duopoly market structure, where two major companies compete. The study employs the Cournot model to determine equilibrium prices and quantities, considering both fixed and variable costs, including driver wages, fuel, and vehicle wear-and-tear. The report evaluates two distinct tax approaches: a per-trip tax and a lump-sum tax, calculating the potential tax revenue for each. It assesses the financial implications of each approach, including the impact on taxi fares and government revenue. Based on the analysis, the report recommends the tax approach that yields higher revenue for the government, enabling funding for public works and infrastructure projects. Furthermore, the report includes recommendations such as implementing a price ceiling to protect consumers from potential price increases following tax implementation. The analysis includes detailed calculations of marginal revenue, marginal cost, and equilibrium conditions, supported by diagrams illustrating market dynamics and the impact of tax imposition. The study concludes by comparing the revenue potential of the two tax systems, providing a rationale for the government's choice of tax policy. The report also contains a bibliography of relevant sources.

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

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PRICE THEORY
Title:
Subject:
Taxi industry analysis for imposing revenue-generating tax by the Ministry of
Transport, Singapore
Prepared by:
Student name
Core Message:
The paper intends to conduct analysis on taxi industry of Singapore so that the
government of this country can implement the best tax system between two
approaches. The chief focus of the government is to earn revenue for investing in
various public works related program along with bridge repair and its upgrade across
the city. The report will cover recommendation, key information and financial
implications to derive the entire scenario precisely.
Recommendations:
Principle Recommendation:
Based on the industry analysis, it can be recommended that the government would
select first approach of tax from where the government of Singapore can receive
higher return.
Additional Recommendation:
The government can implement a price ceiling method to protect the passengers
from experiencing higher prices that taxi industry could impose after implementation
of tax
Key Information:
The taxi industry of Singapore operates under duopoly market condition, as two main
companies have captured the entire market. These two dominating market
companies are Gold Top Taxis and dark Grey Cabs, which have strong competition
with each other. The chief focus of Singapore government is to collect revenue
through imposing tax on this transport industry for completing various public works
including repairing as well as upgrading bridges across the country. For this reason,
the government proposes two tax approaches from which the government will select
the best one from where it can earn comparatively higher amount of revenue.
In the industry analysis section, the report has calculated tax revenue, followed by
the duopoly market of Cournot. By applying proper mathematical technology with
given demand curve and cost structure of two companies, this report has concluded
that first approach can provide comparatively higher amount of tax revenue. The
entire cost structure of these two companies can be divided into two parts, which
are, fixed and variable costs, where the only difference comes on the cost of wear-
and-tear.

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PRICE THEORY
Financial Implications:
The financial analysis represents the entire costs patterns of Gold Top Taxis and
Dark Grey Cabs of Singapore along with the market inverse demand equation of
taxis from where the amount of tax revenue for each company can be calculated.
Costs of these two companies include driver wages along with benefits, fuel, wear-
and-tear of vehicles and corporate overhead (Wang, Wei and Huang 2018). Corporate
overheads provide fixed cost while other costs fall under the category of variable
costs. Each day, both taxi company bear corporate overheads cost worth $100000
irrespective of the number of trips they provide per day to their customers. In addition
to this, each company carries the cost of driver wages and benefits worth $8 per trip
and for fuel $1.50 per trip. However, the cost of wear-and-tear related to vehicles of
these two companies is different due to their different practices of efficient
management (Cui and Notteboom 2017). Gold Top Taxis bears $3 per trip for wear-
and-tear while for Dark Grey Cabs; the amount is $44.50 per trip. By adding these all
these costs, the report obtains total cost of these two companies (Okoh, Ebi and
Johnson 2017). In addition to this, the report obtains total revenue of these two
companies by multiplying their individual inverse demand curve with the number of
taxis they provide every day for their customers. Through differentiating total cost
and total revenue of each company with their respective number of taxi, this report
calculates marginal benefit and marginal cost (Impullitti and Licandro 2018). The report
measures equilibrium fare price that every taxi company charges from their
respective passengers.
After conducting complete analysis, it is observed that first compony provides 18200
taxis to their passengers while the second one provides 16100 taxis. The taxi fare of
these two companies for each trip is $25.5. However, after imposition of tax, based
on first approach, this fare will increase and become $27.9. Hence, from this
approach, the government can earn $82320 amount of revenue (Müller, Fay and vom
Brocke 2018). On the contrary, the Singapore government can earn $70000 revenue
from the second approach. Thus, based on rationale decision, the government can
choose the first approach. Moreover, for the first approach, cost of the company will
be flexible while lump sum is considered as fixed by nature. The first type of tax will
be imposed only on those taxis that will provide service on a day. On the contrary,
lump sum tax considers all taxis of each company and hence it can impose
comparatively more tax burden.

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PRICE THEORY
Industry Analysis:
The taxi industry of Singapore follows the characteristics of an oligopoly market,
where the Cournot model exists and determines the equilibrium price as well as
quantities of both companies (Lambertini and Tampieri 2015). To select better tax
approach for the Ministry of Transport, the following calculations are conducted.
Notation
Q: total number of taxi trips provided by two companies into the market on a single
day
P: Per trip taxi fare charged by two companies
Total fixed Cost (TFC) = Corporate overhead
Total variable costs (TVC) = driver wages and benefits + fuel + vehicle wear-and-tear
Total revenue (TR) = total number of taxi available a day * price for each trip of taxi
Marginal revenue (MR) = change in total revenue for each unit of extra production
Total cost (TC) = TFC + TVC
Marginal cost (MC) = Change in total cost for an extra unit of production
Let, Gold Top Taxis is denoted by subscript G and Dark Grey Cabs by D.
All notations for Gold Top Taxis are as follows:
QG = Total number of taxis available for one day
TRG = Total revenue
MRG = Marginal revenue
TFCG = Total fixed Cost
TVCG = Total variable costs
TCG = Total cost
MCG= Marginal cost
All notations for Dark Grey Cabs are as follows:
QD = Total number taxi provided service for one day
TRD = Total revenue
MRD = Marginal revenue
TFCD = Total fixed Cost
TVCD = Total variable costs
TCD = Total cost
MCD = Marginal cost
Analysis:
P=50 – Q
140 0
 P=50 – QG+QD
1400
For first company:
TRG = P * QG
 TRG =50∗QG – QG
2 +C∗QD
1400
 MRG = 50 – 2∗QG +QD
1400
TCG= TFCG + TVCG
 TCG = 100,000 + 12.50 QG
MCG = 12.50
MRG= MCG

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PRICE THEORY
 50 – 2∗QG + QD
1400 =12.50
 2*QG+ QD = 52500
 QD= 52500 - 2*QG
For second company:
TRD = P * QD
 TRD = 50∗QD – (QG∗QD +QD
2 )
1400
MRD= 50 – QG +2 QD
1400
TCD= TFCD+ TVCD
 TCD = 100,000 + 14 QD
MCD = 14
MRD = MCD
 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
Figure 1: Duopoly market of Cournot
Source: (as created by author)
The above figure represents the market equilibrium condition of Cournot, where
marginal cost equates with marginal revenue at point d within an oligopoly market
(Parenti, Sidorov, Thisse and Zhelobodko 2017). From this, the market can obtain its
equilibrium price for each trip worth P0 while equilibrium amount of taxi become Q0.
First Approach:
In first approach, the amount of tax imposed on every trip is $2.40 and consequently
the government can earn total revenue worth $34300 * 2.4 = $82320 and the taxi

5
$25.5
$27.9
Price
Total taxiO 34300
Staxi
Dtaxi
PRICE THEORY
fare becomes P = $(25.5 + 2.4) = $27.9, which the following diagram has explained
briefly.
The above diagram has represented the impact of tax imposition on each taxi for a
particular day. In the Singapore taxi industry, Staxi represents total supply of taxi per
day by Gold Top Taxis and Dark Grey Cabs while Dtaxi represents total demand
coming from total passenger of Singapore every day.
Second Approach:
Second discusses about lump-sum tax that the government intends to impose every
day without considering the number of taxi providing service each day. According to
this calculation, total revenue will be $35000*2 = $70000 that the government can
earn from these two sectors.
Thus, after entire discussion and analysis, it is observed that first approach of tax
provides higher revenue compare to that of second one. Hence, it could be better for
the government to adopt the first one for financing various public and to repair
bridges in Singapore. Another positive feature of the first approach is that the tax is
imposed only on those taxis that provide services for a particular day. Hence, this tax
system will not increase the burden of tax on both companies. On the contrary, the
second tax is lump sum by nature and consequently, it does not consider the number
taxi that provides service each day. Instead of this, the entire number of taxi is
considered and from this, two companies can experience comparatively more tax
burden.
Figure 2: Impact of tax imposition

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PRICE THEORY
References:
Bibliography:
Cui, H. and Notteboom, T., 2017. Modelling emission control taxes in port areas and
port privatization levels in port competition and co-operation sub-
games. Transportation Research Part D: Transport and Environment, 56, pp.110-
128.
Impullitti, G. and Licandro, O., 2018. Trade, firm selection and innovation: The
competition channel. The Economic Journal, 128(608), pp.189-229.
Lambertini, L. and Tampieri, A., 2015. Incentives, performance and desirability of
socially responsible firms in a Cournot oligopoly. Economic Modelling, 50, pp.40-48.
Müller, O., Fay, M. and vom Brocke, J., 2018. The effect of big data and analytics on
firm performance: An econometric analysis considering industry
characteristics. Journal of Management Information Systems, 35(2), pp.488-509.
Okoh, V.P., Ebi, U. and Johnson, O.O., 2017. Causes of Depreciation in Process
Plants in Cement Industry: Analysis of the Perception of Practising Estate Surveyors
and Valuers in Lagos and Ogun States. International Journal of Humanities and
Social Sciences (IJHSS), 6(5), pp.109-116.
Parenti, M., Sidorov, A.V., Thisse, J.F. and Zhelobodko, E.V., 2017. Cournot,
Bertrand or Chamberlin: Toward a reconciliation. International Journal of Economic
Theory, 13(1), pp.29-45.
Wang, K., Wei, Y.M. and Huang, Z., 2018. Environmental efficiency and abatement
efficiency measurements of China's thermal power industry: A data envelopment
analysis based materials balance approach. European Journal of Operational
Research, 269(1), pp.35-50.