In New York City, drivers for ride-hailing services are now guaranteed a minimum wage.
a. Draw a graph to show the economic effect of this price floor in the market for these drivers.
b. On the graph, identify the minimum wage, the deadweight loss, and the number of surplus drivers that result from the minimum wage
Analyzing the News a. Uber has sued New York City over a law that caps the number of ride-hail vehicles in the city. This restriction is similar to the limit the city places on taxi medallions, which reduces the supply of taxis and pushes ride prices above the competitive market level. Prices above the competitive market price reduce economic efficiency. b. In addition to the cap, New York City has also implemented other regulations on cars driving for ride-hailing companies, including a \"congestion fee\" in the form of a tax on each app-hailed ride in parts of Manhattan. The figure shows a hypothetical example of the effect of this tax on the market for ride-hailing services. Without the tax, the equilibrium price is $20 per ride, with a quantity of 500,000 rides being provided each day. With a $2.75 congestion fee, the supply curve shifts up by $2.75, increasing the price the consumer pays to $21.75, decreasing the price the ride-hailing firm receives to $19.00, and decreasing the quantity of rides being provided from 500,000 to 425,000. The tax revenue is equal to $1,168,750 per day ($2.75 per ride x 425,000 rides). The imposition of the $2.75 congestion fee on rides will generate revenue for the government, but it will also reduce economic efficiency by reducing consumer and producer surplus. Consumers will pay a higher price for rides, which reduces consumer surplus, and firms will receive a lower price per ride, which reduces producer surplus. Some of the reduction in consumer and producer surplus will become tax revenue, but the rest is deadweight loss from the tax, a result of the decrease in the number of rides due to the imposition of the tax. Another new law guarantees ride-hail drivers in New York City a minimum wage of $27.86 per hour, or $17.22 after expenses. A minimum wage is a price floor, which also creates deadweight loss and reduces economic efficiency. c. New York City is just one of a growing number of U.S. cities beginning to regulate and tax ride-hailing companies. Chicago and Washington, DC, have increased taxes on ride-hail vehicles, and San Francisco is pushing the state of California to act on the additional traffic congestion resulting from ride-hailing companies. As in New York City, tax increases and stricter regulations will result in higher prices as the equilibrium quantity of rides declines, reducing economic efficiency. Price $2 \"a!\" Deadweight loss per rude) $2.75 tax shifts Price consumets the supply curve Day after the $215- 321 75 ............................................... Up by $215 per-ride tax is ' , imposed ; i i t 20_00 ................................................. !. i Price received by E ride-hailing 19.00 ............................................... companies after a paying the tax D L = . 0 425.000 500.000 Quantity (rides per day) The market for ridehailing services before and after the imposition of a $2.75perride tax shows that the tax shifts the supply curve up by $2.75, increasing the price paid by the consumer from $20 to $21.75 and decreasing the price received by ride-hailing companies from $20 to $19. The quantity of rides provided also falls from 500,000 to 425,000
