Income vs. Substitution Effects: Why Every Price Change Hits You Twice

You wake at 4:47 a.m. on May 30, 2023, to seventeen unread messages in your danfo drivers' WhatsApp group. The first one stops you cold.

"Government don remove fuel subsidy. Petrol don reach 537 naira per litre."

Yesterday it was 185 naira. Overnight, without warning, the newly inaugurated President Bola Tinubu has abolished Nigeria's decades-old petrol subsidy, and the price at the pump has nearly tripled. Your 1998 Volkswagen Bus burns roughly 30 litres on a full day's Lagos runs. Yesterday that cost you 5,550 naira. Today it costs 16,110 naira. Your typical daily revenue is around 25,000 naira. Your fuel bill has just swallowed two-thirds of it.

You sit in the dark of your one-room apartment in Mushin and do the arithmetic twice, hoping you made an error. You did not.

By 6 a.m. you need to be at the motor park. By 6:15 you need to have decided something, because passengers are already lining up on Agege Motor Road and they will ask you your fare before they climb in.

You have two options, and neither is comfortable.

Option A: Raise your fares immediately. You have been charging 200 naira for the Oshodi-to-Ikeja run. You could raise it to 500 naira today, roughly in line with what your fuel costs now demand. The math works. The problem is that every okada motorcycle taxi on that corridor is still charging 300 naira, the BRT bus is charging 100 naira, and your three competitors from the same park have not yet decided what to do. You could raise fares and watch your bus run half-empty all morning.

Option B: Hold your fares flat and absorb the shock. Keep charging 200 naira, fill the bus, maintain your passenger relationships, and hope the government reverses course or that you can find efficiencies somewhere. The problem is that at 200 naira per passenger and 30 litres of fuel per day, you are now losing money on every trip. You could cut your driving hours to reduce fuel consumption, but fewer hours means fewer fares.

Both options have a logic to them. Both options will leave you poorer than you were yesterday. The question is how much poorer, and why.