F.4 Economics – News analysis
Jacqueline To (30)
Ethel Lam (16)
Karen Leung (17)
Adapted from the South China Morning Post,
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News analysis
1. The Eastern Harbor Tunnel
It is an infrastructure connecting Kowloon East to Island East.
It is a capital of the New Hong Kong Tunnel Company that is used to provide harborcrossing services to vehicles.
2. Elasticity of demand
Original number of vehicles (6am-10am) = 3820/22% = 17364
New number of vehicles = 17364 – 3820 = 13544
Original toll = $15
New toll= $25
Elasticity of demand = 17364 - 13544
$25-$15
17364 +13544
$25+$15
= 0.247
<1
Demand is inelastic because
- The toll rise takes up an insignificant fraction of the expenditure of most users.
They can afford to pay more
- The cost of taking another route (or not driving) is greater
3. Rise in Revenue
The demand for harbor-crossing service is inelastic. When the toll increases (from $15
to $25), the quantity demanded decreases. The percentage rise in toll is greater than
the percentage drop in quantity demanded. Revenue is the product of quantity
transacted and price (toll). Gain in revenue due to toll rise is greater than loss in
revenue due to quantity supplied fall. Hence, revenue is increased.
2
Toll Fee
Fixed S
$25
$15
GAIN
0
LOSS
Qt2
D
Quantity
Qt1
Figure 1. The Eastern Harbor Tunnel – rise in revenue
4. The Cross-Harbor tunnel
The Cross-Harbor tunnel is prone to traffic congestions in the peak hours. The toll is set
below market equilibrium (Pe). Quantity demanded (Qd1) is greater than quantity
supplied (Qs) and excess demand occurs.
The Cross-Harbor tunnel and the Eastern Harbor Tunnel are close substitutes. The rise
in the toll of the Eastern Harbor Tunnel drove motorists to Cross-Harbor tunnel. The
demand increases (from D1 to D2). The new quantity demanded (Qd2) will be greater
than the original one (Qd1). Given that the supply and the toll remains unchanged,
excess demand will be increased and the traffic congestion problem will be more
serious.
3
Price
Fixed S
Pe2
Figure 3. Cross-Harbor
Tunnel – excess demand
Pe1
New excess demand
P = $20
Old excess demand
D2
D1
Quantity
Qs
5. The Western Harbor tunnel
The Western Harbor tunnel is underutilized. The tunnel toll was set aboveOld
theexcess demand
equilibrium price (Pe). The quantity supplied (Qs) is greater than the quantity demanded
(Qd1) and excess supply occurs.
The Western Harbor tunnel and the Eastern Harbor Tunnel are close substitutes. The
rise in the toll of the Eastern Harbor Tunnel drove motorists to Western Harbor tunnel.
The demand increases (from D1 to D2). The new quantity demanded (Qd2) will be
greater than the original one (Qd1). Given that the supply and the toll remains
unchanged, excess supply will be decreased. Quantity transacted increases.
Toll
Fixed S
Old excess supply
Figure 3. Western
Harbor Tunnel – excess
supply
Fixed P
Pe2
Pe1
0
New excess supply
Qd1
Qd2
Qs
D2
D1
Quantity
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6. Other transportations
The toll rise of the Eastern Harbor Tunnel drove motorists to abandon their cars and
look for other ways to cross the harbor.
People took to alternatives that may avoid anticipated traffic congestions, including
MTR, Star ferry and New World First Ferry, which are substitutes to the harbor-crossing
services provided by the Eastern Harbor Tunnel.
a. MTR
14000 extra passengers took the MTR (see above reason). Its demand curve shifts right
(from D1 to D2). To cope with the increase, extra trains were added and the supply
curve shifts right (from S1 to S2). The price remains unchanged and the quantity
transacted increases (from Qt1 to Qt2)
Figure 4. MTR
b. Star ferry
25000 extra passengers took the Star Ferry (see above reason). The demand curve
shifts right (from D1 to D2). The price remains at the same level and the quantity
transacted increases.
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25000
Figure 5. Increased demand for Star Ferry
c. New World First ferry
An average of 17.5% increase in the number of passengers was resulted. The demand
curve shifts right (from D1 to D2). The price remains at the same level and the quantity
transacted increases.
17.5%
Figure 6. Increased demand for New World First Ferry
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7. Cost
Cost is the highest-valued alternative use of money and the highest valued alternative
use of time.
The average time cost in Hong Kong is $1 per minute.
Cost of using Eastern Harbor Tunnel is $25 and the time cost.
Cost of using Cross-Harbor Tunnel is $20 and the time cost.
If the time cost of using Cross-Harbor Tunnel is greater than that of using Eastern
Harbor Tunnel by more than $5, then drivers should choose the eastern route because
of its lower cost.
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