Economics 13th Edition by James Gwartney, Richard Stroup, Russell Sobel, David Macpherson

Exercise 9

In large cities, taxi fares are often set above the market equilibrium rate. Sometimes, the number of licenses is limited in order to maintain the above-market price. Other times, licenses are automatically granted to anyone wanting to operate a taxi. When taxi fares are set above market equilibrium, compare and contrast resource allocation under the restricted license system (assume the licenses are tradable) and the freeentry system. In which case will it be easier for customers to get a taxi? In which case will the amount of capital required to enter the taxi business be greater?