Question

A New York City taxi medallion, which gives the owner a license to operate a taxi, is a valuable commodity. Medallions trade in a weekly market at about a $1M each. There are 15,000 medallions outstanding today, the same as over 75 years ago. The taxi services market is an example of monopoly-like control of competition sanctioned by government regulation -- the New York City Taxi Commission. In the New York City taxi market, suppose weekly demand for taxi trips is estimated as Q = 10 - 0.5P, where Q is the number of trips in millions and P is the average dollar price of one trip. Meter rates currently regulated by the New York City Taxi Commission imply that $15 is the average fare per trip. A fully-utilized taxi can make a maximum of 140 trips per week. The typical taxi's total cost of providing Q weekly trips is C(Q) = 140 + 10Q. Total cost includes driver wages, normal economic profits for the investment in a medallion, taxi depreciation and fuel. Prepare an analysis of the NYC taxi market and answer each question below.

a. Instead of limiting the number of medallions to 15,000, suppose the Commission charges a profits tax to anyone that wants to provide taxi service. At the average regulated fare, what is the maximum tax the Taxi Commission should charge per fully-utilized taxi and how many fully-utilized taxis should serve NYC?

Answer 1

Given

No. Of Medallions = $ 1M each

No. Of outstanding medallions = 15000

• demand function for taxi trips per week :-

Q = 10-0.5P

Where Q = no. Of trips in millions

And P = average rate per trip = $15 (given)

putting value of P in above function, we get :-

Q = 10 - (0.5*15)

= 2.5 M

• Solving for Q (demand) per taxi :-

Q = total weekly demand = 2.5 M

No. Of Medallions = 15000

So demand per taxi = 2.5M / 15000

Q (per taxi) = 167 (rounded off value)

• Cost function for Q trips per week per taxi

C(Q) = 140 + 10Q

= 140 + 10*167

C(Q) = $1807

• Calculating earnings per taxi (E) based on max of 140 trips per week

E = 15 * 140

= $2100

Answers:-

• calculating taxes (T) that should be charged

Remember cost C(Q) calculated above includes both costs and basic profits

So Max tax T = E - C(Q)

= 2100 - 1807

= $ 293

• Calculating No. of fully utilized taxis that should serve NYC :-

Weekly demand (Q) = 2.5 M trips

Max no. Of trips a taxi can make =140 trips per week

So No. Of taxis = 2.5 M / 140

= 17857