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Market Failure Of The Taxicab Industry

2763 words - 12 pages

When San Diego increased the number of licensed cabs by 50% in 1984, average wait time for radio-dispatched taxis fell 20% from 10 minutes to 8 minutes and average wait time at major taxi stands became negligible (Frankena and Pautler). In other cities where deregulation occurred, average wait time decreased, but fares rose, which decreased demand, thus wait time.

• Higher prices: In a monopolistic situation it can be expected that the fares for taxis would be unreasonably high. To combat this, cities regulate fares, as noted above, by setting a standard fare or setting a fare ceiling. Fare ceilings limit the maximum price a taxicab can charge per mile and for pickup fees and time delays. While prices can not go higher than this, unless the authority changes the fare, it provides zero incentive for firms in monopolistic market to provide rates lower than the ceiling. In an open market firms would compete on price until their price became unprofitable, but in a monopolistic market, there is no competition, therefor firms can charge the ceiling price without fear of a decline in demand.

Authorities also have the option of setting a standard fare under which all taxicabs in the jurisdiction must use. The difficulty with establishing a fair standard fare is that authorities must decide between a standard fare that is relatively high and a fare that is relatively low. A relatively high fare limits demand and a relatively low fare causes demand to outstrip supply, which causes wait time to increase (Beesley). Other difficulties surrounding setting a standard fare, include knowing when to raise the price to take into account inflation and consumer wealth. Additionally, a regulatory authority’s decision to raise or lower fares can be heavily influenced by the lobbying of the entrenched taxicab industry.

Additional drawbacks caused by a monopolistic taxicab market include:

• Fewer employment opportunities: As stated above, monopolies lead to fewer taxicabs on the road than is optimal, which means fewer employment opportunities for people looking to make a living in the profession. The 2012 median pay across the U.S. for taxi drivers was $22,820, less than half the national mean, meaning the low income demographic is most affected by the lack of jobs. If the opportunity cost of workers who do not get jobs as drivers due to regulations is less than what they would have earned as drivers then it’s safe to say regulations make this group of workers worse off (Frankena and Pautler).

• Lack of quality: With a monopoly in place, there is little to no reason for a taxicab firm to keep the quality of its cabs at acceptable levels – customers either have to use the taxicabs provided or find alternative transportation methods. In an open market, cabs would be incentivized to have superior quality as it would set their taxi vehicles apart from their competitors and attract more customers (Frankena and Pautler): “Improved service quality, as competition...

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