ELASTICITIES FOR TAXICAB FARES AND SERVICE AVAILABILITY

Abstract

This study utilizes a unique dataset from New York City to examine the effects of taxi fare increases on trip demand and the availability of taxi service. The elasticity of trip demand with respect to fares is estimated to be −0.22; the elasticity of service availability with respect to the taxi fare is 0.28; and the elasticity of service availability with respect to total supply of service is near 1.0. These results have important implications for taxi regulatory decisions. First, fare increases do substantially increase industry revenues but at a lesser rate than the percentage increase in the fare. The implication for policy-makers is that fare elasticities must be carefully considered to obtain desired improvements in drivers' earnings. Second, service availability -- an important aspect of service quality that is generally overlooked during fare policy debates -- should be a central consideration in fare setting, given the considerable impact of fares on availability. Finally, where the supply of cabs needs to be expanded, the number of cabs can be significantly increased without harming the revenue stream of existing operators. This finding alleviates a major industry objection to issuing additional taxicab licenses.