Taxis: In many cities around the world the taxi-cab industry is heavily regulated. Analyze the three different regimes of regulation (a, b and c). Make the follow- ing assumptions: the supply of taxi-rides is upwards sloping and the demand is downward sloping.
(a) Free markets: Show graphically what would be the market equilibrium if there would be perfect competition in taxi industry. Identify the consumer surplus and producer surplus.
(b) Production quota: In many cities, the amount of licenses to operate taxis is limited. For the purposes of this problem, we can think this is a production limit (a maximum production level) of taxi rides set by government. Assume that this limit is lower than the free market quantity of taxi-rides. What would be the prevailing market price and quantity [Hint: the price is read from the demand curve]? Show what happens to consumer surplus and producer surplus. What is the deadweight loss of this policy?
(c) Production quota and maximum price: Suppose that the policy in part b is added to include a regulated price (so the government sets the price of taxi- rides). This is the actual policy of many cities. Assume 1) that this price is such that the suppliers will still supply exactly the production limit and 2) it is lower than the price in part b). What happens to producer and consumer surplus compared to part b)? What happens to deadweight loss compared to b?