Historically, in many cities, taxi fares were often way above the market equilib
ID: 1103351 • Letter: H
Question
Historically, in many cities, taxi fares were often way above the market equilibrium rate, due to government licensing restrictions. In essence, these taxi cartels used government laws to earn excess profits by erecting barriers to entry. How- ever, modern ride-sharing services such as Uber have found innovative ways to bypass these government restrictions, and protests by the taxi industry have been frequent. In some cas- es, governments responded by banning Uber. Compare and contrast resource allocation and market outcomes under the restricted license system and a competitive system. In which case will it be easier (and cheaper) for customers to get a ride? Do you think governments should ban Uber to increase the profits of taxi drivers? Why or why not?Explanation / Answer
Under restrictred liscence system there is an inefficiency and deadweight loss associated in comparsion to competitive system. Inrestricted licenscing due to cartel formation which prevented entry into market by incumbent firms charges higher prices thus producing less than efficient and creating deadweight loss.
In competitive state quantity produced is maximam , surplus to consumer is maximam and thus deadweight loss is zero.
Under competitive scenario custmomers are more likely to get aride because the price charged doesn't have any mark up and is efficient.
No goverment should not ban Uber because uber through innovative techniques is charging price which increase consumer surplus.
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