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BAfter the Berlin wall came down movement between East and West became possible. What happened to the income of taxi drivers, and fares paid by consumers, in East and West Berlin after unification; given that living standards are much higher in West than in East Berlin. Assume the market for taxi cabs is competitive.

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Introduction

Rebecca Mould Before the collapse of communism Berlin was a divided city. After the Berlin wall came down movement between East and West became possible. What happened to the income of taxi drivers, and fares paid by consumers, in East and West Berlin after unification; given that living standards are much higher in West than in East Berlin. Assume the market for taxi cabs is competitive. The toppling of the Berlin Wall began on November 9th 1989; after the East German Government announced that citizens were allowed to cross to Western Germany. However the wall wasn?t fully demolished until June 1990 and in October 1990 East and West Germany were reunified into a single German State. After the collapse of the wall, movement between East and West Germany became possible, and led to a free-market economy on both sides. I will look at how the income of taxi drivers has changed as a result, given that West Berlin has a higher standard of living than East Berlin. Standard of living is the level of wealth, comfort, necessities and luxuries available to a certain socioeconomic class or nation. ...read more.

Middle

As the standard of living is higher in West Berlin than in East Berlin, there will be a higher demand for taxis in the West than in the East; this is the main cause for income being higher for West Berlin taxi drivers than for East Berlin drivers - they can charge a higher fare for the same services because their customers are also getting higher incomes. There will also be a higher supply of taxis in the West than in the East as the higher the income, the more people willing to supply the good. After unification, customers will choose to buy the service from the cheapest taxi drivers, so the demand of services from East Berlin taxi drivers will increase; while the quantity demanded from West Berlin drivers will decrease. The Western drivers will have to decrease the price of their fares to get enough customers to stay in business, this will mean their income will fall and the amount they supply will decrease as a lower income means less incentive for people from the west to supply the service anymore. ...read more.

Conclusion

However, the true effect of the unification on taxi drivers? income and fares depends on the elasticity of supply in the market. If the price elasticity of supply is inelastic, then as demand changes, the price of the fares (and as a result the income) will change dramatically, however if the supply of taxi drivers was very elastic, as demand changes, the fare prices and the income earned by the drivers would hardly change at all. The difference in the price change (due to the shifts in demand and supply) because of elasticity of supply can be shown on the diagrams below: In conclusion, after the collapse of the Berlin wall, when movement between East Berlin and West Berlin became possible, the income of the Eastern taxi drivers increased while the income of the Western taxi drivers decreased. The fares paid by Western consumers would have decreased while the fares paid by Eastern consumers would have increased (or stayed the same). The amount of increase in fare prices depends upon the price elasticity of supply. ...read more.

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