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Following a high court ruling about Uber’s relationship with their customers, the price of each ride may be about to increase by 20%.
The business was previously operated in a way whereby customers entered into a contract with individual drivers rather than Uber itself. This meant customers were exempt from paying VAT in the UK allowing Uber’s prices to remain quite low.
This looks set to change though after a judge ruled that all UK taxi companies are legally obligated to enter into individual contracts with each customer. Whilst this does now increase the level of accountability for Uber, which could lead to an improvement in the quality of their service, passenger safety, and worker’s rights, it also means that a 20% VAT is likely to be slapped on the price of each individual trip.
Q1. What is meant by the term VAT?
Q2. Draw a diagram to show the impact of adding VAT to the price of each Uber ride on equilibrium price and quantity.
Q3. Consider whether the demand for Uber rides is price elastic or inelastic. Explain your answer.
Q4. Following on from your answer to question 3, draw a diagram to show the incidence of the tax on both consumers and producers.
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