Answer to Question #180958 in Macroeconomics for Yeji

Question

The market for ride-hailing services before and after the imposition of a $2.75-per-ride tax shows that the tax shifts the supply curve up by $2.75, increasing the price paid by the consumer from $20 to $21.75 and decreasing the price received by ride-hailing companies from $20 to $19. The quantity of rides provided also falls from 500,000 to 425,000.

Thinking Critically

1. The figure shows the market for rides before and after the imposition of a $2.75-per-ride tax. How can we use the figure to measure the effect the tax has on consumers and on Uber and Lyft? Redraw the graph and show the areas representing the losses to consumers and to firms resulting from the implementation of the tax.
2. In New York City, drivers for ride-hailing services are now guaranteed a minimum wage. Draw a graph to show the economic effect of this price floor in the market for these drivers. On the graph, identify the minimum wage, the deadweight loss, and the number of surplus drivers that result from the minimum wage.

Answer 1

1. The effect the tax has on consumers and on Uber and Lyft can be shown as a decrease in both consumer and producer surpluses.

2. The economic effect of this price floor will create a surplus of drivers in the market for these drivers, because the quantity demanded will be lower than the quantity supplied. The deadweight loss will occur as a result of such price floor.