Download 2) Student work 2

City taxi Groups call for fare rises
Summary of the news:
Fifteen urban taxi groups have applied for fare rises. They proposed a HK$2 rise to
the flag-fall price of HK$20, and adding 10 cents to the current HK$1.50 for every 200
metres after the first 2km.
Introduction:
The fare rise was due to rising inflation, fuel charges and maintenance costs. The
taxi group hoped that the fare rise can cover the extra costs and relieve their burden.
We are going to apply the following concepts to explain the consequences of the rise
in taxi fares:
 Demand and supply
 Opportunity cost
Economic Analysis:
1. The Law of Demand: When the price of a good increases, other things being
constant, the quantity demanded for the good decreases and vice versa.
P
P1
P0
D0
0
Q
Q1 Q0
Demand curve for taxi service
There is an increase in the price of taxi service from P0 to P1, the quantity demanded
for the taxi decreases from Q0 to Q1.
P. 1
2. Factors affecting supply: cost of production
An increase (decrease) in cost of production of a good leads to a decrease
(increase) in supply of the good.
P
S1
S0
0
Q
Supply curve of taxi service
An increase in price of fuel leads to a decrease in the supply of taxi service.
Therefore, supply of taxi service decreases from S0 to S1.
3. Factors affecting Demand: price of substitutes
Substitutes: goods that can satisfy the same want of a customer.
An increase (decrease) in price of one leads to a increase (decrease) in demand
for another.
P
P
P1
P0
D0
0
D0
Q
0
D1
Q
Q1 Q0
Demand curve for taxi service
Demand curve for bus service
Since the buses service and the taxi service are substitutes. When the price of
the taxi service increases, quantity demanded for taxi service will decrease. The
demand for the buses service increases from D0 to D1.
P. 2
4. Opportunity cost: The highest –valued option forgone
After the urban taxi fare rises, patrons have to pay at least $2 more than before.
Their opportunity cost of taking the taxi service increases. It is because they have
to spend extra resources ($2). A higher-valued option has to be given up.
For taxi drivers, a rise in fare may not increase their revenue as there are fewer
patrons. Their income may drop due to shrinkage of business.
For the government, it has to use extra resources to settle the discontent of
citizens if the taxi fare is permitted to increase.
5. Conclusion:
A rise in taxi fare will lead to a decrease in the number of patrons. Therefore, it is
not a good way to relieve pressure caused by LPG price rises. In our opinion, the
government should consider the introduction of an LPG surcharge in taking taxi
service which depends on the rate of increase in LPG prices. This can help solve
the problem of rising fuel costs for the drivers as the surcharge can offset the
surge in their operating costs. At the same time, the burden on the public of
taking taxis can be lessened, for there will not be a uniform raise in taxi fares.
Contrary to an increase in taxi fares, a surcharge can be adjusted flexibly
according to fluctuations of the oil price. The surcharge will be cancelled when
the oil price drops and thus causes a smaller effect on passengers. It is a fairer
arrangement than a uniform rise in taxi fares and will be less controversial.
P. 3