Question

1. The taxi industry in the city has become very competitive. Entry and exit are currently easy. Anyone can enter the market without a license or certificate and use their own cars. The major taxi company has complained that it is hard to make any profits and wants the city to institute a program that requires taxi drivers to purchase a medallion per car before it can operate. Moreover, the taxi company has incurred significant costs to build its fleet and wants the city government to grandfather it and provide medallions for its fleet at no cost. In addition, the grandfathered taxi company is financially much better off than all of the other taxi services. The grandfathered taxi company wants the city to only issue medallions equal to or less than 90% of the total taxis now on the road. The grandfathered taxi company makes up 70% of the current total taxi fleet. Other existing taxi companies or new entrants would need to purchase medallions to keep operating. The medallions will be auctioned off to the highest bidder and can be resold after their purchase. The grandfathered taxi company will also be able to purchase medallions at the auction. The city agrees with the major taxi company’s proposals and implements the medallion program as outlined above.

a. What was the status of the industry before the new medallion program was implemented?

b. How has the industry changed with the implementation of the new medallion program?

c. How was the price and quantity taxi rides determined before the policy change?

d. How will the price and quantity for taxi rides be determined with the new policy in place?

e. How will the prices of the medallions be determined?

Answer 1