Higher unemployment caused by the recession and higher gasoline prices have cont

Question

Higher unemployment caused by the recession and higher gasoline prices have contributed to a substantial reduction during 2008 in the number of vehicles on roads, bridges, and in tunnels. According to The Wall Street Journal (April 28, 2009), the reduction in demand for toll bridge and tunnel crossing created a serious revenue problem for many cities. In New York, the number of vehicles traveling across bridges and through tunnels fell from 23.6 million in January 2008 to 21.9 million in January 2009. "That drop presents a challenge, because road tolls subsidize MTA subways, which are more likely to be used as people get out of their cars." In an apparent attempt to rise toll revenue, the MTA increased tolls by 10 percent on the nine crossings it controls.

a. Is MTA a monopolist in New York City? Do you think MTA possesses a high degree of market power? Why or why not?

b. If the marginal cost of letting another vehicle cross a bridge or travel through a tunnel is nearly zero, how should the MTA set tolls order to maximize profit? In order to maximize toll revenue? How are these two objectives related?

c. With the decrease in demand for bridge and tunnel crossings, what is the optimal way to adjust tolls: raise tolls, lower tolls, or leave tolls unchanged? Explain carefully?

Explanation / Answer

a) The MTA Bus Company was created in September 2004 to assume the operations of seven bus companies that operated under franchises granted by the New York City Department of Transportation. It has created a natural monopoly and is exercising great power in market as it wouldn't make sense for competing systems to operate, and US don't have room underground and on our streets for multiple iterations of infrastructure.

b) When MC of letting another vehicle cross the bridge is zero, MTA will establish equilibrium at the point where the elasticity of demand will be equal to one.This is for the simple reason that the monopolist has to adjust his output where the total revenue is maximum.

c) With the decrease in demand for bridge, revenue will also decline. But it will depend upon the elasticity of demand whether to increase decrease or make tolls rate same. If elasticity is inealstic then toll can be increased as increased toll will not reduce much more demand other wise it should be reduced when it is highly elastic and should be remained smae when demand is neither elastic nor inelastic.

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