Econ Individual Report

BUS10407 Economics

Individual Assignment

Background

Recently, taxi drivers of Hong Kong raised discontented voices on the government proposal to introduce franchised taxi services^[1], which aims to maintain a higher quality of taxi services. However, there are some contradict issues.

Analysis of issues

The franchised taxi scheme is somehow raising other problems rather than improving the quality of taxi services.

1. For franchised taxi drivers:

• Further tightening competition

Nowadays, fewer visitors are coming to Hong Kong. As well as the raise of Uber and Jumbo Taxi (i.e. substitutes of franchised taxi) that also aim at providing higher quality services. Competition is tight already, it is less attractive to enter the market, so the quantity supplied of taxi drivers is inadequate all along.

Graph 1

In graph 1, the supply of normal taxis unchanged (i.e. 18,000 licenses), as more substitutes^[2] would decrease the demand for a normal taxi (D1 to D2), lowered both price level (P1 to P2) and quantity transacted (Q1 to Q2). Thus, the average earnings of taxi drivers generally lowered (P1*Q1 to P2*Q2), so fewer people is willing to enter the market. [pic 1]

Graph 2

Although it is claimed that the target customers^[3] between the franchised taxis and normal taxis are different. However, it is hard for franchised taxis to seek for more passengers during non-peak hours.[pic 2]

From graph 2, the fee for franchised taxis is set above that of normal taxis (P1 > Pe). During peak hours like off-duty time, people would have higher time cost^[4], while normal taxis are hard to hail, so franchised taxis is another option as people perceive that the gain from lowered time cost is greater than the loss of paying more on franchised taxi. Whereas people during non-peak hours would think adversely. Thus, the use of franchised taxi is low-utilized, this inefficiency of production further lead to the following problem.

1. For government and the public:

• Lack of taxi drivers and low-utilized franchised taxis decrease societal efficiency

Graph 3

The taxi industry is in monopoly structure since the government is the sole taxi licenses party. Graph 1 has indicated that tight competition leads hardship for correlated taxi companies^[5] to employ qualified taxi drivers. As a result, there are found many vacant taxis in Hong Kong^[6]. [pic 3]

From graph 3, the supply of taxi drivers decreased (S1 to S2) with number of licenses^[7] unchanged, finally lower the output (Q1 to Q2) results in production less than the socially efficient level, deadweight loss exists.