Case Study: Taxis Rank Disgust
Lead Story-Dateline: The Economist, March 16, 2002
London Taxi drivers seem to have a very special status in the city. In order to be Eligible to become a Taxi driver, candidates are required to learn the city routes In great detail and pass an exam based on this routes. (Learning the routes and passing the test often takes more than a year.) There are currently 24,000 taxi drivers in the city.
The official regulations for the taxi trade have been under some pressure for reform and the task has fallen to a man named Ken Livingstone.
Livingstone’s proposals have, overall, been intended to increase the supply of Taxis in the city. One reform has been to increase the price of taxi rides after 8 pm through new surcharges. In some cases, this has meant that the price of a fare has gone up by 60%. Other reforms have been focused on the numbers of drivers. One measure has decreased the number of routes that are tested in the qualifying exam. Other market issues are not addressed by the new reforms: One huge barrier to entry is the actual cost of a new taxi, quoted as approximately $39,000 (“Partly because it has to be able to perform a U-turn in less than 7.76m (25ft))”.
Perhaps due to the problems in the taxi trade, another market has been growing in London: Mini-cabs. When used, the minicabs cost less than regular taxis, but they are not allowed to pick up fares off the street. One quick solution to the supply problem could be to allow these minicabs the freedom to operate more like regular taxis. This does not seem to be a solution that Livingstone is pursuing. As the article states, “The man who took on Margaret Thatcher doesn’t have the battle to battle with the cabbies.”
Question 1.- Consider the supply and demand of taxi rides at night. The article discusses policies that are aimed at that market. Given the desired impact of the policies, what do you think are the market conditions that the government is trying to correct?.
Question 2.- The article discusses the very strict test which is required for all taxi drivers. Explain what you think this would mean for the supply (and shape or slope of the supply curve) for taxi rides in London.
Question 3.- Consider the discussion of demand elasticity. Given your answer to question 2, how would you characterize the supply elasticity of this market? Think specially about the shape of the supply curve. What are the ramifications for the market?
Question 4.- What could be the impact on the supply curve of changing the exam (for example, making it “less costly” for potential taxi drivers to take)? Show both supply curves on a graph and discuss the impact of a change in price. How is this related to supply elasticity?.
Question 5.- Now turn to demand elasticity. One proposal from the article is to allow mini-taxis more freedom to compete with the regular taxis. How would this impact the elasticity of demand? Explain. What are other possible substitutes to taxis?
Question 6.- Cab drivers have been against the proposal to increases fares at night, the article quotes one trade paper as saying that the price increases were “ Appallingly handled.” Assume the cab drivers are responding to the impact they believe such a price increase will have on total revenue. Explain what must be true about the demand elasticity.