Economic News Report
F.4A Lydia Chan (3), Nancy Cheng (6)
Eastern Harbour Crossing has recently raised the price from $15 to $25 for private cars and other vehicles, it is a 76% increase.
The quantity demanded for Eastern Harbour Crossing decreased by 40% since the first day after the price increase.
Why does the company of Eastern Harbour Crossing raise their price by a large extent ? It is because it is a private enterprise,
they can earn more total revenue as they may not consider the social interest or benefit. The entrepreneurs of Eastern Harbour
Crossing think that the demand for their tunnel is inelastic, so that if percentage change in price is larger than the percentage
change in quantity demanded they can earn more total revenue. At the same time the low-income consumers may shift to use
other harbour crossing such as Cross Harbour Tunnel.
From the graph (a), we can see that the supply of Eastern Harbour Crossing is fixed (perfectly inelastic) and the demand for
Eastern Harbour Crossing is inelastic. Therefore, price increase from $15 to $25 (Pe->P1), quantity demanded decreases
(Qe->Q1). As percentage increase in price is lager than percentage decrease in quantity demanded, gain will be larger than loss,
excess supply also occurred.
The Cross Harbour Tunnel’s demand increased because it is a substitute of the Eastern Harbour Crossing. It faced the problem
of excess demand after the Eastern Harbour Crossing increased their price. The company of Cross Harbour Tunnel does not
rise their price to the new equilibrium price (Pe2) because it is owned by the government, it is a public enterprises which does
not aim at making profits, more people can afford the service.
From graph (b), the supply of Cross Harbour Tunnel is also fixed (perfectly inelastic), demand increases so the demand curve is
shifted to the right (D1->D2) and quantity demanded increased (Q1->Q2). There has been already excess demand in Cross
Harbour Tunnel but as price remains unchanged (P1), there was a larger excess demand (ed1->ed2). So then, there was more
serious traffic congestion after Eastern Harbour Crossing raises its toll. Vehicles have to queue up for a longer time to cross the
Harbour through Cross Harbour Tunnel.
P
S
P
S
Pe2
Excess supply
P1
Pe1
gain
Ed1
Pe
loss
P1
Ed2
D1
D
0
Q1
Qe
Eastern Harbour Crossing
Graph (a)
Q
0
Qe Q1
Cross Harbour Tunnel
Graph (b)
Q2
D2
Q