Saturday, December 17, 2005

Follow up on Economics of transportation

KT Man:

Thank you for your comments, allow me to respond.

I agree that natural monopolies are no different, the only thing going for them is economies of scale, to price out rivals.

I think demand is somewhat elastic depending on which transportation you look at. Remember if transportations costs get too high, even firms will consider letting workers work from home (Boeing does that here in the US).

There is a difference as to only people who use the system pay and every citizen paying. If I drive a car, or work from home, why should i subsidize every other person who travels? If I only use the system once a month, why do I have to pay for every single day. This is the difference between a Liberal and a Socialist. It's nothing to do with your logic, you just assume that costs should be carried by society as a whole, while I think that the users of the goods should pay.

Keeping the cost of living low means that the government must invariably subsidise a whole range of products. Should it also subsidise all basic neccesities, electrcity (already subsidised), telephone, and water (subsidised)? You could also argue for the case of subsidised internet connection, if you consider that a neccesity in Singaporean life. Education is already heavily subsidised all the way to the tertiary level. The money has to come from somewhere. We could shut down a number of programs if you want, but that still will not yield that much money. How much of the military would you like to cut down? Police force? Fire department? Museum? Library? Customs? Immigration? Hospitals (subsidised too)? Embassies? Courts? Prisons? The question is how much can you cut before you compromise other public goods?

Outside of taxation and sale of bonds, I cannot figure out how the government can raise more taxes? The ERP is just a road consumption tax. If they charge trains to use the rail, then it's a rail tax. I mean I cannot think how. Lottery I suppose... That could be it, but that's just another form of income tax on the poor (the richer you are the less you spend proportional to your income of the lottery, barring gamblin addicts, but then how did they get rich in the first place). What other forms of "creative" fund raising does the government have?

As for exempting goods, from a consumption tax could be difficult. Then you'd have to seperate them from the other goods. Two classes of supermarkets? Should we only subsidise cheap brands or all brands? In DC sales tax is 5.75% but liqour tax is higher.This has created a situation where supermarkets do not sell liqour, and the creation of specialised liqour stores. Arguably the supermarkets could sell both, but they do not, it must have to do with creating more complex software to compute two tax rates.

Do not underestimate market power of an oligopoly, especially a cartel (it's basically a monopoly). They could drop rent for the taxi drivers to say $40 and then say that their taxi rates will now start at flagdown of $2.00 and instead of $0.10/km, it could be $0.06/km. For the firm the taxis are a sunk cost. If drivers are unhappy, the supply of new drivers is not scarce. They don't have market power in the labour market either. For potential entrants (individuals not other firms from other industries with huge war chests), this can be a huge barrier.


Thank you for your comments.

For natural monopolies see above. That's the textbook definition. They are definetely manmade since they got to the point of EOS through government intervention.

I agree also that the government should remove itself form the tranportation business and let the chips fall where they may. A light regulatory touch instead of a heavy one.

Again I think it may be possible for a Perfect Competition market to evolve. Information is not perfect, but can be near perfect. You must remove the big firms though. Imagine:

Country A has a population of 100. Monthly income is $50 There are currently 5 taxis in operation. Demand for taxis places the price at $1/km. Taxi drivers sort of sense they can charge you about $1, they're not stupid (ok a few may be). So they start making economic profits of $10/month. This encourages other guys to get a taxi. So 10 new taxis join. Now we're at 15 taxis. This shifts the market supply curve, more supply! Yay! So now consumers are no longer willing to pat $1/km. The new drivers might charge $0.80/km (which is the new marker equilibrium). Quickly the old drivers follow or get priced out. Now the individual "firm" is making an economic loss of $2/month. Some taxi drivers will leave the business. Eventually economic profits are zero. This does not mean that people are not making a living. It's just that their opportunity costs match their profits.

This is an exaggeration, and you could well be right. It may be more difficult to get rates out. But if there were no taxi companies, each taxi driver would fight for your fare. They could use a meter or just tell you flat out. "How much to Orchard from Changi? $15? Too expensive. $10? Cannot? Ok never mind then. I'll just grab the cab behind." DC actually operates on that kind of system. They use zonal payments, which never works, the drivers try to cheat you. But if you're not willing to pay, then you just go to the next one that is offering a price you want. The more expensive driver will realise that he's getting priced out by his other rivals. Similarly drivers also cannot be had by consumers. If they know with accounting costs and everything the ride to Orchard from Changi is $8, they won't go lower than that, and if they know there are 3 other guys waiting who are willing to pay about $15 for the trip, they just won't take you for $10. Invisible hand of the market.

The only other way is for the government to take the trouble and draw a demand and supply curve. Ask stupid questions like at $0.15/km would you take a cab? At $0.20? $2 flag down fee would you take it? $3? And then extrapolate from there. Similarly ask taxi drivers questions. At $0.15/km will you drive? $3 flag down fee? And so on. Tedious, but that's one way, and then let everyone know that the market equilibrium is at $2.50 for flag down and $0.20/km. That's another way i guess. Not so good, but might be better. This is of course top of my head, and I'm not an expert in transport economics.

By the way when I say firms in Pefect Competition with relation to taxis, I mean individual taxi owners. Sorry for that error.

A good discussion gentlemen. I do enjoy such intellectual discussions. Maybe I am too pedantic or too textbook-y, but I belive that theory informs practise and vice versa. These models cannot hold for so long unless there is truth to it. Maybe we woudl have to alter them a little, but I do not believe that their entirely wrong when applied to the real world either.


At 3:18 AM, Blogger kwayteowman said...

To respond to your point about Boeing allowing employees to work from home, I'd like to point out that I was talking about low-income, lowly skilled workers. How do you expect them to work from home?

It is unfortunately not possible for society to function if everyone pays for everything they consume. The economics do not work out 'cos the poor really don't make enough. There's some element of socialism in all countries, more in some than others.

However, as you rightly pointed out, there's not point arguing whether more or less socialism is better 'cos it's a matter of personal opinion/values, not a matter of logic.

Your question as to how we can increase taxation or cut funding to meet shortfalls arising from my proposals to increase transportation subsidies and eliminate consumption tax on necessities need not be answered at this point.

Just trust me that it can be done without too much trouble. :-) I'm quite familiar with the workings of the bureaucracy.

The supermarket check out counters are all computerized and honestly, it's not a big deal to exempt some classes of items from GST. The small time provision shop owners, if they still exist, may have some trouble, but I doubt it's a major concern.

Let us not argue about implementation at this point 'cos I believe neither of us are experts in the implementation. It suffices to note that while you think implementation is hard, I disagree. Question is whether if we assume that implemenation is not an issue, the fundamental economic arguments are sound.

Given the high overheads, I really doubt that the taxi companies can price out individuals with predatory pricing. In any case, you have to remember that we're talking about a case where the barriers to entry have been lifted.

Suppose a company does take losses and forces a whole lot of individual taxi drivers out of business, the moment it stops, new taxi drivers will come back. Taxi companies cannot sustain losses indefinitely to keep up predatory pricing.

I do have some comments on your points to shianux, but I will mind my own business and let him respond to you himself.


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