In NYC cab drivers have to acquire licenses to become cab drivers. They are pret
ID: 1251494 • Letter: I
Question
In NYC cab drivers have to acquire licenses to become cab drivers. They arepretty costly and protect the drivers that are already present in the industry. Still, there are zillions of cab drivers in NYC and they tend to be very picky in terms of their choice of passengers. If they can afford to ignore customers from time to time they might be making excessive profits. Let’s assume that they make excessive profits (that’s actually a fact). Does this phenomenon violate the model of pure competition? Why or why not? Explain.
Explanation / Answer
Yes, this violates the model of pure competition. First, we know that this is a violation of pure competition because firms make a positive economic profit. That is sufficient. Second, we know that this violates the model of pure competition because firms have the ability to price discriminate. This is what they are doing by being "picky" with who they pick up and who they don't. By being "picky" they choose those riders who look like they are traveling a short distance and may tip well. This is price discrimination even if the fare is technically the same and it can only occur if firms have market power (not pure competition.) Third, the licenses themselves are a barrier to entry because firms must purchase a license before entering the market. Firms who cannot afford the license won't enter. In pure competition, there are no barriers to entry.
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