As an economist, in addition to being able to analyze a situation, you will need to be able to communicate your ideas to others.  In this writing assignment, you will be acting as an economic policy advisor.  Your task is to read the scenario below, and do two things: 1) analyze the policy being considered using the analytical tools we have been developing in ECO200, and 2) write a brief, professional memo outlining your policy recommendation.

 

Scenario:

            The city of Doronto has, in effect, three taxi cab companies.  Acme Taxi is the oldest and currently has the most market share.  Best Taxi and Crazy Taxi are newer, and currently each have less market share than Acme Taxi.  Right now, Best Taxi and Crazy Taxi are in talks to merge and form a single firm, which would leave the town of Doronto with two taxi-cab companies.  Of course, Doronto has some laws regarding competition policy, which requires city approval before companies over a certain size in key industries (including transportation) can merge together.  As a result, Mayor McNeill has to eventually make a decision about whether or not to approve this merger.

Best Taxi and Crazy Taxi are of course in favor of the merger.  Representatives from the two firms have put forth preliminary arguments that the advantage of allowing these firms to merge would be a reduction in the costs for these firms.  They claim that by operating as a single larger firm with lower costs, they can not only be more profitable, but also lower the prices they charge for taxi rides.  They argue that since they can charge lower prices for their services, they can be more competitive with Acme Taxi, which will benefit consumers as well.

On the other hand, some consumer groups are worried that having fewer, larger firms will lead to increased market power for those firms.  Representatives from these consumer groups argue that having fewer, more powerful firms tends to be bad for consumers as those firms use their market power to keep prices and profits high.  They are especially worried about whether having fewer firms may make it more likely that those firms will collude and form a cartel.

Doronto is still in the preliminary stages of investigating this merger.  Mayor McNeill has asked for your help in interpreting the claims advanced by the representatives in favor and against this merger.  The preliminary research indicates that Acme has lower costs, the most market share, and makes the most profit, while Best and Crazy have higher costs, substantially smaller market share, and make substantially less profit.  Acme also has the most taxi drivers available, although of course there are a finite number of drivers at each of the companies.  Mayor McNeill is primarily interested in the well-being of the consumers of his town, but since the taxi companies do pay taxes as well, he is also somewhat interested in firms’ profitability.  All of the claims that the representatives are advancing seem somewhat convincing to Mayor McNeill, and he has enlisted your help in understanding whether the claims made by the firms are reasonable, and whether they are telling the whole story.

Your task is to analyze the situation described, using the models we have discussed in ECO200.  Notice that this is not a calculation problem – your job here is not to compute specific welfare or profit amounts, but to describe whether, or under what conditions, the claims made by the representatives are accurate.  When would it be a good idea to let the firms merge?  When would it be a bad idea to let the firms merge?  What information should Mayor McNeill look for next to help make this decision?

 

Instructions:

Your task contains two parts, an analysis and a cover letter.

Analysis: In this section of your writing assignment, you should analyze the above scenario using the tools we have discussed in ECO200.  You may assume that your audience has also had ECO200.  This means that you should model and describe the situation under consideration using tools we have discussed, and analyze the predictions of that model as it relates to the policy objectives.  If you arrive at a conclusion about whether the policy is a good idea or not, you should explain your reasoning.  If you cannot determine from what you know, you should explain what you know and what you would have to consider when making the decision to implement the policy or not.  You should be clear about what you are considering when making your policy recommendations, and how those factors impact your decision.  If you make any additional assumptions (beyond those mentioned above), you should clearly state them and if relevant, address what would happen if those assumptions do not hold.

Length: Your analysis part of the writing assignment should be approximately 750 words.

 

Cover Letter: In this section, you are communicating the main results from your analysis to Mayor McNeill in a clear and concise way.  This letter should be professional but not technical in nature – it should explain the main ideas of your analysis in a way that can be understood by someone who is not an economist.  The purpose of the cover letter is to summarize the information from your analysis – the things you say in your cover letter should be supported in your analysis section, and the main results of your analysis should be included in the cover letter. The cover letter should provide some kind of guidance – this could be to allow or disallow this merger.  Or, if you cannot make a clear recommendation without more information, describe what more you need to know, and how it would help you to make this decision.

Length: Your cover letter should be no more than one page (about 250 words), including the formatting.  You should include your name and student number in the upper left-hand corner, but format the rest of this part of the assignment as a letter or a memo.  We will not require a specific style for the letter, but it should include an appropriate salutation and closing, and be written in a professional tone.

Logistics:

  • Submit your assignment online to Quercus.
  • To submit your assignment, follow these instructions o In “Assignments” click the item titled “Writing Assignment 2”. o Follow the file naming guidelines below. o Uploaded files should not include special characters in the file name for example, # !  %  ?.  Do not attach multiple files with the same name.
  • Your assignment will be graded according to a rubric. The rubric is posted in the Writing Assignments folder in the “Files” section of the Quercus webpage.

 

Formatting:

To earn full marks, you must do the following:

  • Your assignment must be typed, double-spaced and have a font size of at least 12 points in Times New Roman.
  • Put the word count of your assignment in parentheses at the end. For example, “(X words)”
  • The file you submit must be a PDF document.
  • Files must be named FamilyName_GivenName_ECO200_1 for the first assignment and FamilyName _ GivenName _ECO200_2 for the second assignment, where FamilyName is your family name and GivenName is your given name.