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

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 free-entry 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?