Regulating taxi services in the presence of congestion externality

In most large cities, the taxi industry is subject to various types of regulation, such as entry restrictions and price controls, and economists have examined the economic consequences of such regulation extensively. Unfortunately, in conventional economic analyses of competition and regulation in the taxi industry little attention has been paid to one important issue: congestion externalities due to both occupied and vacant taxi movements together with normal vehicular traffic. This study investigates the nature of equilibrium and regulation in the taxi market by taking account of congestion externalities and adopting a realistic distance-based and delay-based taxi fare structure. The monopoly, the social optimum and the stable competitive solutions are examined and illustrated with a numerical example.