The Welfare Effects of Taxicab Regulation in English Towns

The effects of entry and price regulation in the taxi industry are analysed. Previous work has not taken full account of the peculiarities of the taxi market and has underestimated the welfare loss caused by inappropriate regulation. This paper presents a model of the taxi industry which demonstrates that if price competition is infeasible then the market will necessarily lead to an outcome which is socially undesirable. In particular, there will be too many taxis operating at too high a price. This holds whatever the elasticities of demand with respect to price and waiting time. However, this crucial evidence on price and service elasticities has not previously been available. To that end, we present the results from a number of case studies which demonstrate the size of potential market failure under different conditions. Optimal price-setting, together with free-entry subject to quality controls, is the efficient strategy for regulating the taxi trade and could increase welfare considerably.