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Short-Run and Long-Run Tax Effects

Part I

Gus the cab driver rents a cab and pays for gas. In each of the following circumstances, describe the (A) short-run effects & (B) long-run effects on the price and quantity of rides Gus offers. (Use Graphs to aid understanding in A & B)

Question 1 :
The city imposes a $1 excise tax on cab rides, but exempts Gus from the tax because he is a good friend of the mayor.

Question 2 :
The city imposes a $100 annual license fee on cab drivers, but gives Gus a free license because he is a good friend of the mayor.

Part II

This time assume that Gus is subject to the tax and to the license fee (but that he remains in the industry after imposition of each policy), describe the (A) short-run effects & (B) long-run effects on the price and quantity of rides Gus offers. (Use Graphs to aid understanding in A & B)

Question 3 :
The city imposes a $1 excise tax on cab rides.

Question 4 :
The city imposes a $100 annual license fee on cab drivers.

Solution Summary

Tax effects are depicted.

$2.19