Essay on Market Failure of the Taxicab Industry

1816 Words 8 Pages
I. Overview of the taxicab industry

The Taxicab industry plays a vital and large role in the U.S. urban transportation system, employing 233,000 drivers (United States Bureau of Labor Statistics) and providing transportation to millions of Americans each day. Taxicabs differ most substantially from alternative urban transportation systems, like busses and subways, as customers select the final destination, opposed to adhering to a predefined route. This flexibility is reflected in the higher price of taxicabs (Moore and Balaker) compared to other public transit services. Substitutes for taxicabs include busses, subways, trains, limousines, private drivers, car ownership and rental cars, among others (Brennan).

The taxicab industry can
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There are five key areas of regulation:

1. Entry restrictions: Cities impose heavy restrictions on the number of vehicles and/or firms licensed to perform taxi services and entry restrictions are at the core of taxicab regulations (Schaller). New York City, for example, has issued a total of 13,437 medallions (New York City Taxi & Limousine Commission), which are attached to the hood of a vehicle and grants license to the vehicle to provide taxi service. This number of current medallions is actually lower than the number the city had issued in 1937 (Frankena and Pautler), despite population growth of nearly 1.5 million residents (New York City Government) during that time. The city hosted an auction, its first in five years, in November of 2013 for two medallions, with the winning bid exceeding $2.5 million (Flegenheimer). The issuing of new licenses varies from city to city with some taxicab regulatory authorities granted authority to issue new licenses if there’s a demonstrated need with others adhering to a strict ratio of licenses to population.

2. Fare controls: Nearly all major cities regulate how fares are computed and fare rate, which leaves firms unable to engage in fare competition (Frankena and Pautler). The most common form of fare control is the meter system which factors in pick-up location, mileage and time delays when computing the fare of a particular ride.

3. Service restrictions: Many taxicab regulatory authorities prohibit

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