Canis Lee (17) 4A
Vicky Tong (28) 4A
Newspaper Cutting:
The franchise for the construction and operation of the Eastern Harbour Tunnel (EHT) was
awarded to the New Hong Kong Tunnel Company Limited. Since it is a private limited company,
which aims at making profits, therefore, the price is determined by the price mechanism. The
company makes the all decisions. The New Hong Kong Tunnel Company Ltd announced to
increase the crossing tolls of all types of cars at least 60% on 1 / 05 / 2005.
The supply of the tunnel is fixed (perfectly inelastic supply). The tolls for bus increased from
$45-$75 (67%), since the bus company is not allowed to choose another cheaper tunnel for some
bus routes. So the bus company’s demand for tunnel service is inelastic. The increase in
percentage change in price is greater than the decrease in percentage change in the quantity
demanded. Gain is greater than loss. The original revenue gained by the tunnel company is P1Q1,
after increasing the price, the total revenue is P2Q2. As a result, the revenue of the tunnel
company increases in this case. Also, when the market price s higher than the equilibrium price,
quantity demanded is smaller than quantity supplied, there is an excess supply.
P
S
ES
P2
22
P1
22
Gain
Loss
D
Q2 Q1
Bus company’s demand for
Eastern Harbour Tunnel service
Q
For private cars, there are some substitutes of the Eastern Harbour Tunnel such as Cross Harbour
Tunnel which collects a lower crossing toll. The drivers can choose it. Since the drivers have
substitutes, the quantity demanded for Eastern Harbour Tunnel decreases. Private cars drivers’
demand for Eastern Harbour Tunnel crossing is elastic. The increase in percentage change in
price is smaller than the decrease in percentage change in Qd, loss greater than gain. The original
revenue is P1Q1, after increasing the price, the revenue is P2Q2. As a result, the revenue gained
by the tunnel company decreases in this case. Also, when the market price s higher than the
equilibrium price, quantity demanded is smaller than quantity supplied, there is a larger excess
supply.
P
S
ES
P2
P1
Gain
Qd
Loss
Q2
Q1
Q
Private car drivers’ demand for
Eastern Harbour Tunnel service
In general, the percentage change in price (60%) is larger than percentage change in quantity
demanded (20% mentioned in the newspaper). It is proved that the drivers’ demand for Eastern
Harbour Tunnel is inelastic, total revenue will increase after increasing the price.