Supply and Demand Diagram

SUPPLY AND DEMAND OF FREIGHT RAIL SERVICE Figure 1 . Supply and Demand of Freight Rail Services

STATEMENT OF THE PROBLEM

Show what will happen to the equilibrium level of rates and the quantity of rail service for the following sequence of actions (a ) the federal government enacts a transportation tax on rail rates to generate revenues to conduct research on the global warming effects of rail diesel emissions (b ) enforcement of new Federal identification standards for all truck drivers causes a 30 percent reduction (no need to show exactly 30 percent

) in the available supply of intercity truck transportation services (c ) the railroads adopt Positive Train Control (GPS technology ) to allow them to monitor all train locations nationally and reduce train and engine crews from one two persons to a single person

SOLUTIONS

the federal government enacts a transportation tax on rail rates to generate revenues to conduct research on the global warming effects of rail diesel emissions

Effects on Supply and Demand Equilibrium

Increase in tax would mean less profit for Freight rail services . So more freight rail services will reduce their operation and thus reduce the supply of freight rail services . This will shift the supply curve to the left because of reduction in the number of freight rail services and therefore causes an increase in the equilibrium of freight rail rates See the supply shift shown below Figure 2 . Shift of Supply to the left

enforcement of new Federal identification standards for all truck drivers causes a 30 percent reduction (no need to show exactly 30 percent ) in the available supply of intercity truck transportation services

Effects on Supply and Demand Equilibrium

Due to the reduction in intercity truck transportation services , the demand for freight rail services will increase . The increase in demand would cause a shift of the demand curve to the right . This shift to the right would result in an increase of the equilibrium of freight rail rates as shown below Figure 3 . Shift of Demand Curve to the right

the railroads adopt Positive Train Control (GPS technology ) to allow them to monitor all train locations nationally and reduce train and engine crews from one two persons to a single person

Effects on Supply and Demand Equilibrium

This has no direct effect on the supply and demand curve , but if the public will be informed of the additional security to the freight services dues to the GPS technology then this might even increase the demand and cause a shift in the demand curve to the right just like the answer to item b

References

C . MacConnell , S . Brue (2005 . Economics : Principles , Problems , and Policies , 16 /e . Origins of Idea (Chapter 29 . Retrieved Feb 08 2007 from http /highered .mcgraw-hill .com /sites /student_view0 /chapter29 /interactive_graphs .html...