Question

What does it mean for a good to be non-excludable? In theory one may worry that such a problem could completely shut down private markets. How did we deal with that in designing a private environment for the public goods case so that this doesn't happen? How and why did we use game theory in this design?

Answer 1

At Time 1, the market for taxi rides is in balance. Hence, supply is equivalent to request: the cost of taxi rides is at a dimension where the quantity of individuals willing to take taxis at that cost is equivalent to the quantity of rides cab drivers will move at that cost.

If the government artificially raises the price of taxi rides, then they become more expensive for consumers (people who need taxi rides). Thus, they will demand less taxi rides (assuming demand is responsive to prices, i.e., demand is elastic).

Now, with less demand, taxi drivers will not be able to provide as many rides as before.

Whether their incomes go up or not is dependent on how elastic demand is (basically, how responsive is demand to changes in price).

If demand is not very elastic, then we can expect that raising the price won't cause a drastic decrease in the number of rides that people take, so overall, taxi drivers will see more money come in. However, if demand is very elastic, then raising the price will cause a lot more people to forgo taxi rides, and taxi drivers could very well see a decrease in total income.