Economic Principles Written Assignment-

There are two parts, A and B, to this assignment. You need to answer both.

Part A: Disruptive Technologies

A major focus of economics is the analysis of markets and the impact of regulations. This part of the assignment involves an economic analysis of the Victorian taxi industry. The taxi industry is currently undergoing significant change, especially from competition from Uber. For some background reading see: 

(1) https://www.choice.com.au/transport/cars/general/articles/uberx-vs-taxi-which-one-is-best; and

(2) http://www.theage.com.au/victoria/taxi-glut-fears-as-hundreds-swoop-on-cheap-new-melbourne-licences-20140815-104hb1.html.

Task 1: Industry Structure

a) Compare the cost of a standard  taxi ride versus a ride with UberX  from Deakin University, Burwood campus to the Melbourne Tullamarine airport. Which would you prefer? Explain your answer.

b) Assume that the taxi industry operates in an  unregulated market and is characterized by monopolistic competition. Assume also that taxis and Uber are substitutes. 

(i) Using diagrams, illustrate and discuss the long-run equilibrium of the taxi industry and individual monopolistic competitive  taxi companies before and after the introduction of UberX. (Hint: use one diagram for the industry and a separate diagram for the individual taxi company.) 

(ii) To what extent does the monopolistic competition model accurately reflect the taxi market in Victoria?

(iii) To what extent does the oligopoly,  or the monopoly, model accurately reflect the taxi market in Victoria?

c) The Victorian taxi industry is regulated by the Taxi Services Commission (TSC).  The TSC issues taxi licences, accredits drivers, and ensures that the industry complies with legislation and regulations (http://taxi.vic.gov.au/about-us/taxi-services-commission). 

(i)  Use demand and supply analysis to illustrate and assess the impact of licences on the supply of taxi rides and the price of taxi rides, in the scenario where the TSC does not limit the absolute number of taxis but merely sets a licence fee for all taxis. For this question ignore all the other activities of the TSC and assume that they only regulate tax licences. 

(ii)  Use demand and supply analysis to illustrate and assess the impact of licences on the supply of taxi rides and the price of taxi rides, in the scenario where the TSC sets a limit on the absolute number of taxis and sets a licence fee for all taxis. For this question ignore all the other activities of the TSC and assume that they only regulate tax licences.

(iii) The TSC also sets the maximum fares that taxis can charge. Use demand and supply analysis to illustrate and assess the impact of fare regulation on the price of a taxi ride and the number of taxi rides in Victoria. For this question ignore all the other activities of the TSC and assume that they only regulate taxi fares.

(iv) In contrast to taxis, UberX is currently not regulated in Victoria; UberX faces neither licence nor fare regulation. What impact does this difference in regulation have on competition in the taxi and ride-sharing industry?

(v) Fare regulation is often supported by politicians because of the view that there is a corporate social responsibility to make taxi travel affordable. What other options are there to support those who would otherwise find taxi travel too costly?

Task 2: Prices

a) In this task we first explore the value of a Victorian tax license.  

(i) Construct a time series graph of the price of a Victorian license, for the years 2004 to 2014 (plot the years on the horizontal axis and the price of the licence on the vertical axis).  The data can be collected from the Australian Taxi Industry Association webpage: http://www.atia.com.au/taxi-statistics/. You can use Excel or any other program to construct the graph.

(ii) Referring to the graph you constructed in (i) above, discuss the patterns in the value of the taxi license. 

(iii) It is often claimed that the introduction of Uber in 2012 led to a collapse in the taxi license price. Evaluate this claim with reference to the time series graph you constructed in part  (i)? What factors other than Uber affect the taxi license price?

b) According to the Taxi Services  Commission webpage: "In metropolitan Melbourne, you will pay the lowest fares during the day, a little more for overnight and peak fares after 10pm on Friday and Saturday nights."  Explain the logic behind the regulator changing the fixed price for taxi services so that it varies over the course of the day and across the week.

c) One feature of Uber is 'surge pricing'. This makes Uber prices less predictable. Use a diagram to illustrate and explain the economics behind surge pricing. You may find the following useful background reading: 

(1) http://uberestimator.com/uber-surge-pricing and   

(2)

http://www.slate.com/articles/business/moneybox/2014/0/uber_style_surge_pricing_does_the_system_make_sense_for_d_c_cabs.html

Part B: Economics of Military Conflict

An important area of economics is the analysis of conflict. While many social and political factors drive violent conflict, we here focus on economic causes. We discuss and compare the Coase Theorem and the Machiavelli Theorem. Recall that the Coase Theorem  focuses on the  "opportunity to cooperate by means of mutually advantageous exchange". In contrast, the Machiavelli Theorem focuses on "opportunity to gain a one-sided advantage by exploiting another party".  In this part of the assignment we explore the links between economics and military conflict. Specifically, we will explore the links between commodity prices and armed conflict in Colombia. 

The conflict involves the Colombian government, right-wing paramilitary groups, and left-wing guerrilla groups (see Dube and Vargas, 2013). The main guerrilla groups are FARC and ELN. While their stated aims are communist revolution, their motives might be broader. For example, FARC is the richest guerrilla group in the word (http://www.bbc.com/news/world-latin-america-11400950). This raises the possibility that the guerrilla groups are driven by economics and not just ideology.

The data used for this question relate to the period 1988 to 2005 for 950 municipalities in 32 Colombian regions (known as departments, or departamentos).  The sample contains 17,964 observations and includes 8,808 guerrilla attacks throughout Colombia involving 34,018 casualties (the conflict actually cost about 220,000 casualties). The data we analyse come from: Dube, O. and Vargas, J. 2013. Commodity Price Shocks and Civil Conflict: Evidence From Colombia, The Review of Economic Studies 80: 1384-1421. You do not need to read this study. If you do, it is sufficient to read up to page 1391.  Our research question is: to what extent were these attacks and casualties driven by economic factors?

a) Dube and Vargas (2013) argue that the value of coffee production, i.e. the price of coffee times the area of land under coffee cultivation is an important determinant of conflict in Colombia. Using the data on Colombian armed conflict, construct a scatter diagram that shows the relationship between the number of attacks (on the horizontal axis) and the value of coffee production (on the vertical axis). The data can be found in the Assessment Resources folder as the Excel file Conflict in Colombia. You can use Excel or any other software to construct a scatter diagram.

(i) What does the scatter diagram tell us about the relationship between the number of guerrilla attacks and the value of coffee production? 

(ii) Explain how the concept of opportunity cost might explain this relationship.

b) Similar to a) above, construct a graph that shows the relationship between number of casualties (on the horizontal axis) and value of coffee production (on the vertical axis). What does the graph tell us about the relationship between the number of casualties and the value of coffee production?

c) In this question we consider policy options to reduce violent conflict.  

(i) Do the results from a) and b) above suggest that the Colombian government should stabilize the price of coffee? What are the costs of price stabilization?

(ii) The Colombian government and the main rebel group have recently agreed to a bilateral ceasefire.  This includes two economic dimensions: land reform involving redistribution of land to poor farmers, and the end of illegal drug trade, with drug production to be replaced by alternate crops.  Explain how these ceasefire conditions relate to opportunity cost. How successful do you think drug trade elimination will be if the world price of illegal drugs increases?

For background reading see:

(1) http://www.bbc.com/news/world-latin-america-19875363 and 

(2) http://www.theatlantic.com/news/archive/2016/07/farc-cocaine-colombia/489551/.

2000 words

6 Harvard reference.