In 2012, two Oakland City Council members called for slashing the annual fees th

Question

In 2012, two Oakland City Council members called for slashing the annual fees the city charges for taxi medallions from $1,019 a year to $510 (Matthai Kuruvila, "Cheaper Oakland Taxi Medallions Proposed," San Francisco Chronicle, December 17, 2012). They say that they want to help cabdrivers. Cab companies own and pay for the medallions. These companies charge drivers $500 a week to use the cabs. Would cutting the annual medallion fee help driversExplain. Assume cab companies will pass at least a portion of the savings in lower annual medallion fees on to cabdrivers in the form of lower per-week cab fees. Also assume that the number of medallions is not fixed. Cutting the medallion fee would O A. help cabdrivers by reducing entry barriers. OB. hurt cabdrivers by increasing competition O C. hurt cabdrivers by decreasing market surplus D. help cabdrivers by lowering market prices OE. help cabdrivers by increasing profit

Explanation / Answer

High medallion fees were acting as barriers to entry and kept many potential cab drivers out the market. Right now the cab drivers have to pay $500 for the medallion to the cab company after the decreased fee they will be paying a much lesser amount to the cab companies.

Because of this step by the administration, there will be more cab driver in the market and the competition will increase. Till now some drivers were enjoying monopoly power but now more and more drivers will walk in and provide their services. Overall this will increase competition and hurt the profit of cab drivers.

the correct answer to this question is "Hurt cab drivers by increasing competition" (this is an extremely beneficial decision for the commuters as they will enjoy less price because of increased competition)  

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