Uber Taxi Economics - Assignment Example

Running header: Microeconomics Microeconomics Author’s Name Institutional Affiliation Date of submission 1. After comparing the cost of a standard taxi ride versus a ride with UberX from Deakin University, Burwood campus to the Melbourne Tullamarine airport, I would prefer UberX. The reason why I would prefer UberX is that its pricing model guarantees the traveler a cheaper price almost all the time compared with the price charged for a Standard taxi ride. Uber pricing is cheaper than that of Standard Taxis with research indicating that Taxis are more expensive than Uber 89% of the time. For instance, the maximum taxi rate is more than double Uber’s per minute rate which is also replicated in per kilometer rate (News.com, 2016). The Taxis prices are regulated with maximum prices in each stage with two or three pricing brackets including the day rate, the peak rate and the overnight rate. On the other hand, Uber’s pricing is variable fluctuating with demand and supply through its surge pricing. Even with surge pricing, UberX is still cheaper than Standard taxi rides. From an economic point of view therefore, I would prefer the cheaper priced UberX. 2. The long run equilibrium of the taxi industry and individual monopolistic competitive taxi companies before and after the introduction of UberX In the long run, with free entry and exit, the price in the market will be equal to the industry’s marginal cost as well as the average total cost. Firms in the industry will thus choose their quantity so that marginal cost will equal price (Castle, 2015). This will ensure that the firms will maximize their profit. In the long run, entry into and exit from the industry will drive the pricing of taxi rides to the minimum point on the average total cost curve. Thus, the long run equilibrium for the industry will be as follows, After the entry of Uber In the monopolistic competitive taxi industry, the monopoly-like pricing will result in a decreasing demand in the long-run for the already existing firms as customers prefer the cheaper Uber. This will increase the need for differentiation in the industry leading to increasing average total cost. Decreasing demand and increasing costs will result in the long-run average cost curve becoming tangent to the demand curve at the industry’s profit maximizing price. Thus, the competitive firm will have surplus production in the long run while it will only break-even in the long run and not be able to earn an economic profit. The long-run equilibrium of the taxi company will thus appear as shown below; ii) How the monopolistic competition model accurately reflect the taxi market in Victoria, The monopolistic competition model accurately reflects the taxi market in Victoria for a number of reasons. First, there are many taxis whether by companies or individuals and many customers in the market with no single taxi or Taxi Company having control over the market price. Despite the many producers, customers do not perceive non price differences among the taxi rides they offer. Finally, there are very few barriers to entry or exit to or from the industry despite the fact that there is some level of regulation by the government. Although prices are generally regulated, taxi owners or taxi companies do have some level of control over the prices they charge their customers. iii) The extent to which the oligopoly or the monopoly, model accurately reflect the taxi market in Victoria The oligopoly model accurately represents the taxi market in Victoria in that there is some level of government regulation in the market thus the market has some level of barriers to entry. The barriers include licensing among others. Although there are many individual taxis, these taxis are operated by only a few taxi companies though smaller taxi firms including those operated by their individual owners also exist. There is also a lot of interdependence in the industry. Owing to the size of the individual taxi companies controlling the market, their actions affect the entire market. For instance, with the entry of UberX in the industry, the fact that it is charging lower prices and that it is more reliable than the Standard taxi has upset the market and market participants must come up with ways of responding to the actions by UberX. This has seen the entry of non-price competition in the industry since though there are price differences between the various taxis companies, the companies are also competing on the basis of the quality of services offered. C) The effect of introduction of licenses on the supply of taxi rides and the price of taxi rides, in the scenario where the TSC does not limit the absolute number of taxis but merely sets a license fee for all taxis. The introduction of taxes is in itself a barrier to entry for the industry since only those who can afford the license fees would be able to acquire licenses and hence offer their services to the industry. As such, the impact of introducing licenses would be a downward shift in the supply. However, since the government does not limit the number of licenses issued, the supply would continue to be there as long as there are people interested in the taxi industry who can afford the license fee. The supply curve would thus shift from S to S1 as shown below. The quantity supplied thus reduces from Q to Q1. S1 Price D S P1 p Q1 Q Demand On the other hand, the taxi rides would be priced higher from P to P1 to cater for the cost of acquiring the licenses. ii) The impact of licenses on the supply of taxi rides and the price of taxi rides, in the scenario where the TSC sets limit on the absolute number of taxis and sets a license fee for all taxis. In this case, the government has effectively limited the number of taxis that can operate in the industry which is in effect an introduction of a quarter effectively barring other taxis from entering the industry after the quarter has been reached. The effect will be a reduction on supply of taxi rides in line with the quarter. The taxi rides will however be offered at a higher price with the increase in price being the license fee that the government charges for the taxis licenses. This is shown in the figure below; the taxi operators receive the price P1 while the consumers pay the increased price P2. The difference between the two prices will is the license fee. Supply P2 P1 Demand Quarter quantity Quantity iii) The TSC also sets the maximum fares that taxis can charge. The following diagram assesses the impact of fare regulation on the price of a taxi ride and the number of taxi rides in Victoria Price P1 Price ceiling with no effect P0 P2 Price ceiling causing shortage Q1 Q0 Q2 Quantity The effect on price and quantity of tax rides will depend on whether the government sets a maximum price that is above the market equilibrium or that which is below the market equilibrium (Hubbard, and Lewis, P2014). If the price set is above the market equilibrium, this will not have any effect on either the price or number of tax rides. However, if the price is set below the market equilibrium, the consumers will enjoy cheaper prices which will bring the demand for the tax rides up. However, few tax owners or companies will be willing to supply at the lower price. Thus, a lower quantity will be supplied implying that the number of taxi rides will decline as customers can only cope with what the owners of taxis avail to the market. iv) In contrast to Taxis, UberX is currently not regulated in Victoria, UberX faces neither license nor fare regulation. The impact of this difference in regulation on competition in the taxi and ride sharing industry is that Uber is able to be more competitive in the market (Perloff, 2008). This is because it does not incur such regulation costs as licensing and hence it is able to charge lower fees and even provide better quality services compared to Taxis that have to comply with the regulators rules. This has the effect of creating uneven playing field handing UberX undue advantage over its fellow competitors. Thus, it is able to do more business and hence accumulate more profit in comparison to Taxis. v) Fare regulation is often supported by politicians because of the view that there is corporate social responsibility to make taxi travel affordable. There are many other options to support those who would otherwise find taxi travel too costly. This include cycling and walking which are also advantageous as far as cost saving and one’s health is concerned. One can also use personal or private vehicles to travel. In addition, the public transport system such as buses is a cheaper option that one can consider. 3. Time Series graph of the price of Victorian license, for the years 2004 to 2014. ii) The patterns in the value of the taxi license Since the year 2004, the price of tax licenses rose from $275,200 to $415,600 in 2011 on an year to year basis. However, the rising trend stopped in 2012 when the value of the taxi license started falling. The value fell to $381,200 with the declining trend continuing for the three years to $350, 000. Thus, the taxi licenses value experienced two different trends during the years 2004 to 2014 with a rising trend from 2004 to 2011 and a declining trend from 2012 to 2014. iii) It is claimed that the introduction of Uber in 2012 led to the collapse in the tax license price. This is true given that Uber is not regulated and hence the drivers affiliated to it do not have to have the licenses. The effect is that many people now opt for Uber services whether as drivers or as customers since their model is better for both (Pindyck, 2001) . Thus, the entry of Uber brought down the demand for licenses. With the low demand, it means that the prices had to come down as can be seen from the graph. As from 2012, the license price has continued to decline up to 2014 as depicted in the graph. Other factors that affect the taxi license price include their demand from people and companies acquiring taxis as well as the government policy regarding the industry since it is the regulating body that decide what prices to charge for the licenses. According to TSC webpage:” in metropolitan Melbourne, you will pay the lowest fares during the day, a little more for overnight and peak fares after 10 pm on Friday and Saturday nights.” The logic behind the regulator changing the fixed price for taxi services so that it varies over the course of the day and across the week is to enable the taxis to make charge more and hence make more profits during the peak times when the demand is high with the supply being constant. It is in line with the law of demand whereby when the demand is high, prices have to rise with the supply remaining constant. c) One feature of Uber is surge pricing. This makes Uber prices less predictable. The following diagram explains the economics behind surge pricing. The model is such that when the demand is high during peak times, the price of Uber rides goes up with the prices going back to normal when the demand is normal or low (Diakopoulos, 2016). The idea is to encourage more Uber drivers to get to the market during the peak times so that they can make more money during the peak time. This serves to balance demand and supply such that everyone prepared to pay the higher price does so. Economically, the Uber pricing model allows for the gain in efficiency from the increased demand by surging the prices to prevent dead weight loss. PART 2: To what extent were the attacks and casualties driven by economic factors? The number of guerrilla attacks The scatter graph above shows the relationship between the number of guerrilla attacks and the value of coffee production. i) The graph tells us that when the value of coffee production is high, there are very few or no guerrilla attacks. However, when the value of coffee production is low, the number of guerrilla attacks increase. ii) The concept of opportunity cost might explain this relationship in that the guerrilla attacks are result in the low coffee production since the producers know that what they produce or the money they earn from coffee production will be stolen by the attackers (bbc.com, 2013). As such, when the attacks are high, they would rather not get involved in coffee production. The attackers also disrupt coffee production hence resulting in low production. However, when it is peaceful, coffee production rises but when this happens, the attacks again increase as the attackers try to forcefully enjoy the gains of high coffee production value. The number of casualties The scatter graph above shows the relationship between the value of coffee production and the number of casualties. The relationship between the value of coffee production and the number of casualties as depicted by the scatter graph is that when the value of coffee production is high, there are very few or no casualties. However, when the value of coffee production is low, the number of casualties rises. i) The results from a) and b) above suggest that the Columbian government should stabilize the price of coffee. A number of costs are involved in price stabilization. The government needs to undertake a lot of research into what the ideal price of coffee is. The government also needs to invest in marketing the coffee and hence selling it on behalf of the famers. Whenever the actual price is lower than the standard price, the government would have to pay the difference from its coffers. All these activities involve money which is the cost of price stabilization. ii) The ceasefire conditions relate to opportunity cost since each side (the government and the guerrilla groups) would have to forego some benefits for the sake of a stable Columbia. For the guerrilla groups, they would have to forego the income from illegal drug trade for coffee production while the government would have to undertake land reforms which will redistribute the land to the poor (Dube and Vargas, 2016). All these actions involve foregoing some benefit for something regarded better by the conflicting parties. In this respect therefore, what is foregone can be regarded as opportunity costs. If the price of illegal drugs increases, the drug trade elimination may not be successful since the guerrilla groups will find selling the illegal drugs more beneficial compared to coffee production. References: News.com, 2016, A new report explores the benefits of Uber, Retrieved on 5th September 2016, from; http://www.news.com.au/finance/business/travel/a-new-report-explores-the-benefits-of- uber/news-story/5e41687c9bc2614f07015f85eb784f7f Castle, J2015, UberX vs taxi- which is bets? Retrieved on 5th September 2016, from; https://www.choice.com.au/transport/cars/general/articles/uberx-vs-taxi-which-one-is- best Pindyck, R2001, Microeconomics, London, Prentice-Hall. Perloff, J2008, Microeconomics: Explore and apply, Boston, Pearson. Hubbard, G&, Lewis, P2014, Essentials of economics, London, Rutledge. Diakopoulos, N2016, How Uber surge pricing really works, retrieved on 5th September 2016, from; https://www.washingtonpost.com/news/wonk/wp/2015/04/17/how-uber-surge-pricing- really-works/ bbc.com, 2013, Profiles: Columbia armed groups, Retrieved on 5th September 2016, from; http://www.bbc.com/news/world-latin-america-11400950 Dube, O& Vargas, J2016, Commodity price shocks and civil conflict: Evidence from Columbia, Retrieved on 5th September 2016, from; http://www19.iadb.org/intal/intalcdi/PE/CM%202015/15908.pdf Read More