Suppose your city is committed to raising $100 million for a new arena. The mayor suggests putting a tax on taxicab rides since out-of-towners disproportionately use taxicabs.

(a) Evaluate the wisdom of this policy decision and explain your reasoning

(b) Use the rent gradient to show why New York did not build a new stadium for the Yankees in midtown Manhattan.

Answer:a) The decision on putting a tax on taxicab rides would not be a wise decision. The tax on taxi cabs can negatively affect local residents and businesses more than it would affect the out-of-towners. Adding a tax would further shift taxicab rides on the supply curve by the amount that is taxed. Therefore, people can just try to avoid taking taxicabs while they are visiting due to not willing to pay the price, but this could affect local residents. In addition, if the taxicab owners do not want to charge their customers more or people stop taking taxes the extra tax cost would make taxi drivers suffer. The mayor may be doing this because he is making efforts to have more funding money but is actually damaging the city and businesses if this is done. This could hurt both the taxicab driver and local residents, due to an increase in higher prices individuals would be less likely to pay these higher prices further suggesting this is a bad idea.

B) The city would not likely build a new stadium for the Yankees in the middle of town due to the relative value of the land that would be required (a high value of the rent gradient). The land that lies on the outskirts of town is less valuable than the land at the center. That is one reason why Yankee Stadium and Shea Stadium were built in the "outer" boroughs of Bronx and Queens.