ECON1048 Price Theory Assignments Solution

ECON1048 Price Theory Assignments Solution

ECON1048 Price Theory Assignments Solution

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 report 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.

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.

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 income taxation 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:

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 P0while 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 fare becomes P = $(25.5 + 2.4) = $27.9, which the following diagram has explained briefly.


Figure 2: Impact of tax imposition

The above diagram has represented the impact of tax imposition on each taxi for a particular day. In the Singapore taxi industry, Staxirepresents total supply of taxi per day by Gold Top Taxis and Dark Grey Cabs while Dtaxirepresents 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.

References:

Bibliography:

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