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    Price Elasticity of demand formula (Ed)

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    The Mayor of Elasticity

    Mayor Michael Bloomberg (R-NYC) in the Spring 2007, 2008, 2009 and again in 2011, was rebuffed in his attempt to institute a "congestion" pricing plan for lower Manhattan. Essentially the Mayor wanted to impose an $8 surcharge on any car entering lower Manhattan Monday-Friday, from about 6 am - 11 am. This would have raised millions for the city. This fee would be in addition to any other tolls paid. What type of reduction in traffic do you think NYC would have seen because of congestion pricing? Keep in mind that Mayor Bloomberg is well versed in economics. His re-vamping of parking fines (increasing them from $25 to $125), reducing the time on parking meters (from 2 hours to 1 hour down to 1/2 hour) while increasing "meter-patrol," and, in some sections of NYC, enforcing alternate side of the street parking 7 days a week. In a major snow storm in 2008, the Mayor wanted to let stand the $125 fines that traffic agents had issued to thousands of NYC residents who were plowed into their parking spaces on the street. In a public outcry and enormous pressure from the NYC press he backed down, but it took him several days to do so. In addition, in the Spring 2011, the Mayor's proposal to institute a $400 charge for EMS services when they are called to an auto accident was rebuffed by the City Council last week. The Mayor thought, rightfully so, that such a charge would raise lots of revenue. The City Council thought this was a bit ghoulish, but did understand that it would revenue - they voted down anyway.

    So, you need to: Discuss this congestion pricing and EMS charge in terms of elasticity - why would the Mayor focus on this? Is this an elastic or inelastic good/service? Why do you believe that? Obviously, you need to keep in mind elasticity and our discussion/reading of what NYC has/has not done.

    (Please keep in mind elasticity and answer should not be too short).

    Please see the attachment.

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    Solution Preview

    Mayor Bloomberg, well versed in economics, understands the inelasticity of the services he wished to charge fees for. The people that commute to New York City understand that there is a subway system available. However, there is obviously a reason why people that drive into the city use cars instead of the subway. Because a substitute exists (the subway) for driving into the city and people still choose not to use it, driving into the city must be inelastic in the sense that the commuters that do not use the subway are not responsive to changes in price of either the subway or driving into the city. If driving into the city were elastic, then Mayor Bloomberg should expect that most of the drivers would start using the subway system, which is not the ...

    Solution Summary

    Price Elasticity of demand formula (Ed) is demonstrated.