Question

Nashville is considering two options for limiting the number of cabs operating in the city. The first option is to charge a very high license fee each year on each cab, and the second option is to charge a per ride tax. Assume that the long-run supply curve is horizontal in the unconstrained competitive equilibrium, there is free entry and exit, that individual cabs face increasing marginal costs of giving rides, and that the costs facing a cab don't depend upon the number of competitors. Comparing the two options by considering the effects on welfare and government revenue, which is the best option and why? O A. The daily tax because government revenue will be higher, and the welfare loss will be less than with an annual license fee. O B. The daily tax. Although the welfare loss is greater, it will be more than offset by the additional tax revenue. O C. The options are equivalent in that each will generate the same amount of revenue, and each will create the same deadweight loss. OD. The annual license fee because the government will capture the producer surplus, and there will be no deadweight loss.

Answer 1

Ans: A: Daily Tax will work best to limit entry of cabs in the city. Since, the marginal cost of giving rides is high, the tax will put enough burden on individual cabs and will limit competition in this industry , which might offset the welfare loss that cabs will face due to daily tax.