Consider two cities, City A and City B, which are entirely identical except that Uber operates in City A, but not in City B. Consumers in City A can choose between Uber and a taxi when selecting a means of transport, while consumers in City B can travel only via taxi. When the government imposes a tax on taxis in City A and City B, the price of a taxi ride will increase _______ in City A than in City B.

In the given scenario taxi prices will go up less in City A than City B. This is because in City A we have both Uber and taxis, and there is substitution. If customers don't have taxis they will commute by Uber. So demand for taxis in City A will be elastic. An increase in price will result in a large decrease in demand. Taxi drivers will cautiously increase prices here.

In City B the only option for commuters is the taxi, so the demand will be inelastic. As price increases there is relatively little change in quantity demanded. Taxi drivers can increase prices more here without losing customers.

Parrain Parrain · Answer 2 · 2021-10-29T17:39:01+02:00

Based in the situations of City A and City B, the price of a taxi ride would increase LESS in City A than in City B as a result of a tax on taxis.

When there is a tax on taxies in City B:

Taxi drivers will pass on the entire cost to customers
Taxi fare will increase by the same cost as the tax

When there is a tax on taxies in City A:

Taxi drivers will pass on only some of the cost to customers because they would be facing competition from Uber and so cannot increase prices too much
Taxi fare will only increase by a fraction of the cost

In conclusion, the taxi cost will increase by a less amount in City A than in City B because City A drivers would not want to lose customers to Uber.

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