“Uber will be legalised in NSW but the ride share service is not happy that passengers will have to pay $1 extra for every trip for up to five years to compensate taxi licence owners for the impact of the decision. The NSW government will charge both Uber and conventional taxis the temporary levy of $1 per trip, for up to five years. The levy will raise $250 million over five years and pay for compensation of up to $175,000 for existing taxi license holders.” – Australian Financial Review, Dec 17, 2015 Suppose that White Cabs is the sole authorized operator of taxicabs in New South Wales. a) With the aid of a diagram, explain and illustrate White Cabs decisions with regard to output (how much service it provides) and setting the price of its service BEFORE entry by Uber. What kind of market structure would you expect? Would you expect profit to be positive or negative in the long run in the absence of Uber entry? How are these long run profits different to long run profits in perfectly competitive markets? Briefly explain perfectly competitive markets (3.5 marks). b) What would happen to profitability in the taxicab business as a result of Uber entering the market? Draw a diagram to illustrate your reasoning. Explain how this would affect the welfare of: i. Consumers ii. Cab drivers iii. Government revenue c) Discuss the government plans to compensate existing cab drivers by taxing Uber users. Is the deadweight loss created by tax justifiable? Explain why or why not
