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Market Failure Of The Taxicab Industry

2614 words - 11 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 be divided into four primary taxicab market segments, which are important to keep in mind when analyzing the industry (Frankena and Pautler):

1. Cruising cabs: These are taxis that cruise highly populated areas looking for random customers, who hail taxis for a ride.

2. Taxi-stand cabs: Taxi stands can be found at locations, such as hotels and airports, which see a large demand for taxis. Taxis line up in a queue at the stand and wait their turn for a customer.

3. Radio-dispatched cabs: These taxis are assigned a customer from a radio dispatcher who receives customer requests via telephone or the internet.

4. Service-under-contract cabs: In certain cases, groups or organizations will contract a taxicab firm to provide regular or dial-a-ride service.

II. Taxicab regulations in U.S.

The taxicab industry faces carrying degrees of regulations, which differ state-to-state and city-to-city, but is, for the part, heavily regulated. The industry is one of the most regulated transportation industries in the country (Schaller). Larger cities tend to have stricter regulations, while smaller cities and towns have fewer. 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...

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