Economics for Today 9th Edition by Irvin Tucker

Exercise 32

NEW YORK TAXICABS: WHERE HAVE ALL THE FARE FLAGS GONE?
Applicable Concept: perfect competition versus monopoly
Yellow taxicabs in New York City, which are today one of the most famous icons of the city, are a love and hate relationship. The upside is that you can stick your arm in the air to hail a cab that will take you to your destination. The downside is the traffic jams speckled with yellow cabs that service the city. Flash back to the 1920s, when New York taxicabs were competitive. There was no limit on the number of taxis, and hack licenses were only $10. In addition to a low barrier to entry, taxis engaged in price competition. Cabbies could choose among three different flags to attach to their cars. A red flag cab charged a surcharge for extra passengers. A white flag signaled no surcharge for extra passengers. A green flag meant the cabbie was offering a discount fare. Price wars often erupted, and the vast majority of cabbies flew green flags and charged bargain fares. One strategy was to fly the red flag (high rate) during rush hour and the green flag to offer discounts at off-peak times. Taxi companies also offered a variety of cabs-old, new, big, and small.
As years passed, the system changed because of the concern that competition was causing an overabundance of taxis that congested city streets. The solution was to create a monopoly by law in 1937 designed to limit the number of cabs by requiring all cabs accepting street hails to be painted yellow and possess a medallion on the hood of the] taxi. Currently, the Taxi and Limousine Commission (TLC) sets rates and imposes regulations. There are no price wars, and the barrier to entry is high due to the high price of medallions. Today, the aluminum badges that give the right to pick up passengers on the street cost more than $700,000, as determined at infrequent auctions. Because of their high prices, most cabs are owned by investment companies and are leased to the drivers. On the other hand, it is illegal for cabs without medallions to cruise and pick up passengers who hail them, although the law is often ignored by gypsy cabs. Nonmedallion cabs are authorized to respond only to customers who have ordered the cab in advance by phone or other means. There's no limit on the number of nonmedallion cabs or what the drivers may charge.
Now there is a "sharing economy" with unregulated rideshares provided by companies like Uber and Lyft sporting distinctive thick pink mustaches on the front grill of personal cars. Cab companies have been up in arms, and the ridesharing business faces an uncertain landscape. For example, using green taxis New York has expanded into areas under served by yellow cabs.
Use a graph to compare the price and output of medallion yellow cabs in New York City today with the taxi market before the 1920s.