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.

by beckymould (student)

University Degree Business and Administrative studies

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. As the living standards were higher in West Berlin, the same amount of work buys an increased quantity of goods, and items that may be seen as luxuries in East Berlin; such as cars, computers, mobile phones etc. are more common in the West. When the unification happened, East Berlin’s wages were roughly a third of West Berlins.

We are assuming the market for taxi cabs is perfectly competitive, this means that no single business has the power to affect the price of the product. The price is determined by the ‘price mechanism’ which is described by the interaction of supply and demand for the product. The market price acts as an ‘invisible hand’ making sure scarce resources are allocated in the most efficient manner (those who value them most highly obtain them). Consumers are assumed to have perfect knowledge of competitive markets - they know the price of all suppliers, this means that taxi drivers won’t ...

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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. On the other hand, taxi drivers from the East may be able to charge more as they are opened up to more demand, this will create more incentive for new taxi drivers to enter the market and cause the supply of Eastern taxi drivers to increase. However, in reality because the market is perfectly competitive the Eastern drivers may not charge a higher fare, and supply may only increase because the demand has increased, so a new equilibrium needs to be set.

This can be shown on the following diagram:

This diagram shows how in the long term the quantity demanded for Western drivers (D(West)) falls from Q1 to Q2 and how the quantity demanded for Eastern drivers (D(East)) rises from Q3 to Q2. The diagram also shows as the quantity demanded for Western taxi’s falls, the price they charge in fares also falls, causing a fall in supply from S(West) to S(Unification), this causes an overall fall in price from P1 to P2, this shows a decrease in their income. As the quantity demanded for Eastern taxi’s rises, the price they can charge in fares also rises, causing an increase in the amount eastern drivers are willing to supply, increasing the price further, meaning an overall increase from P3 to P2, this shows an increase in their income.

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.

Bibliography:

Jennifer Rosenberg, The Rise and Fall of the Berlin Wall [online].Available at: [Accessed 13 November 2012]

Rudiger Dornbusch and Holger C Wolf, 1994. The Transition in Eastern Europe, Volume 1 [online]. Available at: (chapter 5.1.3) [Accessed 15 November]

Jeffrey M.Perloff, 2008 Microeconomics Theory and Application with Calculus