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ECON1268 Price Theory Proof Reading Services
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). Meaning only the taxi companies are capable of pushing this tax into consumer behaviour in form of high taxi fares. Only the rich people would be able to access the services. 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). 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.
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. 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. 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.
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 give consumers an upper hand of choosing. It implies that there are likely to be different prices for different routes depending on the number of customers available.
Hence, I would recommend the minister to allow the companies charge different prices for different routes at different time. Meaning during rush hours, high prices would be charged and lower prices for normal hours. It will enable companies to compensate for normal hours where lower prices are charged. Hence high profits are generated during rush hours and the government is able of provide the services for public works (Pettinger 2011).
In the analysis different approaches were used where the benefit theory of taxation was used to give more realistic results. 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. It implies that, tax payers should be taxed according to the services provided.
P1 – price of the Gold taxis
P1– price of Grey taxis
S1 – supply for Grey taxis
S1 – supply of Gold taxis
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, tow 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. 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.
The figure 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 management 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;
Q = (50 – 2.4) *1400
Q = 66640 customers. Then multiplying by price gives the total income as;
Income = 66640 * 2.400 (Khan 2014).
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. Therefore, 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. However, the gold company would not accept and will react by increasing the price above its original marginal cost curve 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. However, low price may increase the demand for the services which may not necessary generates the required revenue. While the other taxi company will need to increase its price (Khan 2014).
The figure above demonstrates the original tax for both companies is at $35000.0 per trip. 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).
1. Khan, A.2014. "Managerial Economics and Economic Analysis", 3rd edition, Pakistan
2. Pettinger, T. 2011. Price Mechanism in the Long Term. In Business Economics Help. Retrieved April 10, 2011, from http://www.economicshelp.org/microessays/equilibrium/price-mechanism-long-term.html
3. Mankiw, N.G.; Taylor, M.P. 2011. Economics (2nd ed., revised ed.). Andover: Cengage Learning.
4. Varian, H.R.2010. Intermediate microeconomics: a modern approach. New York, NY: W.W. Norton & Co