ECON 1056 Cornell University Briefing for The New Taxi Industry Tax Paper

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ECON1056 Managerial and Business Economics
Industry Analysis
SIM, Semester 1, 2022
1
Introduction
Decision-makers in government rely on the advice of experts when formulating policy or
discharging their statutory responsibilities. In this assignment you will take the role of an
expert economist, employed by a government department. An expert economist’s role in
the government decision-making process is two-fold:
• Analysis: Economists use their specialist knowledge and skills to analyse the likely
outcomes of policy alternatives. They then evaluate these outcomes against the
government’s objectives and statutory obligations.
• Communication: Economists communicate their findings to ministers and senior
public servants, who, in many instances, do not share their specialised knowledge.
This assignment will assess your aptitudes in both of these domains. You are to conduct
an industry analysis based on the scenario detailed in section 2. Then use your analysis as
the basis for a brief (a short report) summarising your recommendations and the associated
rationale.
1.1
Formatting requirements
Your assignment must be typed using Microsoft Word, or a similar word processor. Both
parts of the assignment should be included in the same document with the brief placed
before the industry analysis. The document should have a professional appearance, appropriate to a government workplace. Format your assignment as follows:
• Use A4 sized paper with all margins at least 2.5cm.
• Body text to be 12pt and black. (There is no minimum line spacing.)
• All pages to be numbered.
• DO NOT include a cover sheet or table of contents.
• Optional: Save your assignment as a PDF to ensure that your document and equations appear as you intend.
1.2
Grading
There are a total of 100 marks available in this assignment (50 marks for the industry
analysis and 50 marks for the brief), and the assignment contributes 40% of your grade
for Managerial and Business Economics. The marks allocated to each step of the industry
analysis are detailed in section 3. The marking criteria for the brief can be found in the
rubric.
1
2
Scenario
The island nation of Autarka is growing concerned over the amount of rubbish accumulating
in the waters off its coastline. This pollution is harming marine life, damaging fish stocks,
and washing up on tourist beaches. Research by the National University of Autarka has
determined that a significant component of the solid waste is the single-use plastic bottles
used by soft-drink manufacturers.
Currently, soft drink manufacturers in Autarka pay a tax of $0.40 on each bottle of
drink they sell. The revenue from the tax is used to fund the cleaning of roads and public
spaces. The scientific community is lobbying the government to increase the tax to $1.00 a
bottle. The scientists suggest that any additional revenue could be used to fund programs
to remove rubbish from the coastal waters.
There are two producers of soft drinks in Autarka: Bubbles PLC and CarbonCorp.
The two companies do not face competition from imports as the cost of transporting soft
drinks into Autarka is prohibitively high. Moreover, there are no cost effective alternatives to single use plastic containers. The two companies have made submissions to the
government opposing the proposed tax increase, which they claim will harm consumers.
2.1
Your task
The Minister for the Environment has instructed you to determine the likely impact of the
proposed tax increase on the market for soft drinks, and to recommend whether or not the
government should implement the proposed tax increase. Your recommendation should
take into account
• the impact on government revenues,
• the impact on consumers, and
• the impact on the environment.
Note that competition policy prevents the government from imposing any other form of
market regulation, including price controls.
2.2
Industry structure
Research into the soft drink market indicates that the two firms compete by selecting
quantities (Cournot competition). Soft drinks are regarded as a homogeneous good by
consumers, and inverse demand in the market is estimated to be,
P =6?
Q
,
100,000
where P represents the price of a bottle of soft drink, and Q is the total number of bottles
sold per year.
At present soft drinks sell for $3.80 a bottle. Bubbles PLC produces 140,000 bottles per
year, paying $56,000 in bottle tax. CarbonCorp produces 80,000 bottles and pays $32,000.
It is estimated that it costs Bubbles PLC $2.00 per bottle of soft drink produced, while
producing a bottle of soft drink cost CarbonCorp $2.60. The fixed costs of production
can be neglected in this analysis.
2
3
Industry analysis
For your Industry Analysis you must complete each of the steps detailed below. The
required analysis draws on content covered in lectures 6–10 (primarily lecture 9). When
completing the steps you must:
• Type all equations using the ‘Insert Equation’ function (or equivalent).
• Show all of your working.
• Include sufficient written description for the reader to follow your process.
• Use appropriate notation and economic terminology.
Your audience for the industry analysis is other expert economists who may be required to
review your work. There is no page limit for the Industry Analysis.
3.1
Required steps
When completing the industry analysis you should assume that firms are engaged in
Cournot Competition.
Step 1: Using the information provided in the scenario, derive a total cost function for
each soft drink producer for the case in which the government levies a tax of $1.00 per
bottle. Use QB to denote the quantity produced by Bubbles PLC, and QC to denote the
quantity produced by CarbonCorp. Note that a firm’s marginal cost will be the sum of its
cost of producing a bottle, and the tax that it must pay to the government on each bottle
sold. (5 marks)
Step 2: Using the cost functions from step 1, derive a profit function for each firm. (10
marks)
Step 3: Derive each firm’s best-response function. (15 marks)
Step 4: Solve the best-response functions simultaneously to find the equilibrium quantities
for each firm. (10 marks)
Step 5: Find the equilibrium price and tax revenue. (10 marks)
3
4
The brief
The purpose of the brief is to communicate your recommendations to the decision-maker
who commissioned your analysis. You need to provide enough information for the decisionmaker to understand your recommendations, and to reach a decision on the matter at hand.
However, senior government officials are extremely busy, so you must be brief.
• The maximum length for your brief is 2 pages.
• Any content in excess of 2 pages will not be read or graded.
When writing the brief remember that it is for a non-expert audience. You must avoid using
specialised economic terminology and state everything in ‘plain English’. For example:
• Terms such as consumer surplus, producer surplus, and deadweight loss, have little meaning outside of economics and should be avoided. (Note: This is not a
comprehensive list.)
• On the other hand, the significance of terms such as price, revenue, and profit, are
generally well understood outside of economics.
The brief should not include any equations or diagrams. Tables and dollar amounts may
be included as appropriate.
4.1
Template
You must compose your brief according to the template detailed on the following pages.
Instructions for each required element of the brief are included within this template. These
instructions are reflected in the requirements of the rubric for the task. Ensure that your
brief includes each of the elements detailed in the template, and that you do not reorder,
rename, or omit any of these elements.
4
Briefing for the (insert decision-maker’s title here)
Subject: Include a brief but descriptive subject line. Maximum length 1 line.
Hint: The subject is, in effect, the title of your brief. Compose the subject as you
would the title of a report.
Prepared by: Your name here.
Core Message
Write an executive summary of the brief. Your core message should consist of three
sentences: The first sentence providing a summary of the scenario. The second sentence summarising the key rationale for your recommendation. And the third sentence
summarising your recommendation(s). Maximum length 5 lines.
Hint: The statements in the core message should stand on their own. Provide specific
information and avoid generalities. The reader should be able to understand the core
message without referring to the scenario or the rest of the brief.
Recommendation
Concisely state the principal recommendation that arises from your analysis.
Hint: Your recommendation should be stated as a clear course of action for the government to pursue. Be precise. Avoid generalities and ambiguous statements. DO NOT
explain or seek to justify your recommendation in this section. DO NOT describe the
consequences of your recommendation. DO NOT state conditions or caveats for your
recommendation.
Key Information
Begin your key information section with a short (1–2 paragraph) outline of the context for
the brief (as detailed in the scenario), the problem under consideration, and any additional
issues raised.
Hint: These 1–2 paragraphs should set the scene for the reader. They should provide
the reader with sufficient background information to understand the purpose of the brief.
DO NOT use these paragraphs to foreshadow, explain, or justify your recommendation(s).
Use the remainder of the key information section to present the rationale behind your
recommendation(s). You should highlight any trade-offs involved in your recommendation(s), and address any additional issues raised in the scenario. Your rationale should be
presented as follows:
• Use subheadings to concisely state the key findings of your industry analysis. The
maximum length for a subheading is 2 lines (1 line is preferable).
• Write a short paragraph following each subheading to briefly explain the finding.
Taken together, the findings stated in the subheadings should form a logical argument
supporting your recommendation(s).
Hint: Incorporate all information required to support your recommendation(s) in this
section, regardless of whether or not the same information has been included elsewhere in
5
the brief. Each subheading should be written as a statement of fact. DO NOT include an
explanation within a subheading, leave that for the following paragraph. DO NOT assert
facts that are unsupported by either the scenario or your industry analysis.
Financial Implications
Briefly summarise the direct financial implications of your recommendation(s) (if any) for
the Government. Include the precise dollar amounts that come out of your analysis.
Hint: The financial implications section should provide the reader with easy access to
the financial cost and/or benefit of your recommendations to the government. This section
is not a substitute for stating the financial implications elsewhere in the brief. Specifically,
if the financial implications form a part of the rationale for your recommendation(s), they
will need to be included in both the key information section AND the financial implications
section. DO NOT use this section to summarise other market outcomes (eg. profit and
price). DO NOT use this section to present arguments in support of your recommendation(s). This section must be included even if there are no direct financial implications
from your recommendation(s).
Begin your industry analysis on a new page following the brief.
Hint: Use the ‘Insert Page Break’ function in Microsoft Word to ensure the page break
displays correctly.
6
Price Theory (ECON 1056)
Pranay Julka (3683840)
RMIT
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PRICE THEORY
1
Title: Industry Analysis
Subject:
Taxi industry analysis for imposing revenue-generating tax by the Ministry of
Transport, Singapore
Prepared by:
Pranay Julka
Student ID: 3683840
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
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PRICE THEORY
2
are, fixed and variable costs, where the only difference comes on the cost of wearand-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, wearand-tear of vehicles and corporate overhead. 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. 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. 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. The report measures equilibrium fare
price that every taxi company charges from their respective passengers.
After conducting complete analysis, it is observed that first company 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. 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
3
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. 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
1400
QG +Q D
1400
For first company:
TRG = P * QG
Q2 +C?Q D
?
TRG =50?Q G – G
1400
2?Q G +Q D
? MRG = 50 –
1400
TCG= TFCG + TVCG
? TCG = 100,000 + 12.50 QG
MCG = 12.50
MRG= MCG
?
P=50 –
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PRICE THEORY
4
2?QG +Q D
=12.50
1400
? 2*QG+ QD = 52500
? QD= 52500 – 2*QG
For second company:
TRD = P * QD
QG?Q D +Q2D )
(
? TRD = 50?Q D –
1400
QG +2Q D
MRD= 50 –
1400
TCD= TFCD+ TVCD
? TCD = 100,000 + 14 QD
MCD = 14
MRD = MCD
( QG +2 Q D )
?
50 –
=14
1400
? QG + 2 QD= 50400
? QG + 2 (52500 – 2*QG) = 50400
? QG+ 105000 – 4 QG= 50400
? QG = 18200
? QD = 16100
Q = 18200 + 16100
? Q=34300
18200 – 16100
P=50 –
1400
? P = $25.5
?
50 –
Figure 1: Duopoly market of Cournot
The above figure represents the market equilibrium condition of Cournot, where
marginal cost equates with marginal revenue at point d within an oligopoly market.
From this, the market can obtain its equilibrium price for each trip worth P 0 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
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PRICE THEORY
5
fare becomes P = $(25.5 + 2.4) = $27.9, which the following diagram has explained
briefly.
Price
Staxi
$27.9
$25.5
Dtaxi
O
34300
Total taxi
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, S taxi represents total supply of taxi per
day by Gold Top Taxis and Dark Grey Cabs while D taxi 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.
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PRICE THEORY
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