Correlation Between License Purchasing and Economy, Essay Example

Before Mr. Jones purchases a taxi medallion license, he should know what a mixed economy is, and how it might affect his purchase of a license. Many say that America is a market-based economy: what this means is that the price for an item is determined by the interaction of demand (buyers) and supply (sellers) in a certain market. The market equilibrium price will be established where the number of buyers meets the number of sellers at the selected price. In addition, one usually claims that a free market does not have any externalities; or that the full price of the good is priced in the market.

The opposite of this is referred to as the “command and control economy”: In the command and control economy, the equilibrium is not set by the intersection of demand (buyers) and supply (sellers)- but rather by government regulations that influence supply and demand such as a price floor or a price ceiling. This is the case in the taxi medallion market: the government essentially puts a floor on the price of taxi rides by limiting the number of taxis on the street distorting the free market. If the free market reigned, the price charged by taxis would likely be less with more taxis competing for consumers. Thus, a mixed market is one that combines elements of the free market and the command and control economy. Although some posit that a pure “market” economy exists or a pure “control and command” economy exists; this is likely a fallacy. Even economies like the United States , which certainly espouse a market philosophy, have certain sectors that are regulated quite heavily: utilities; health care; energy. By the same logic, economies such as China and Vietnam, which have kernels of socialist planning mechanisms, have sectors that resemble a market-based system: retail, restaurant, and manufacturing. Although these examples are not comprehensive, due to the complexity and political influence in managing the economy, likely all the economies of the world have some aspect of these two systems.

Turing to the questions about the medallions, the equilibrium price and quantity in the free market would be 100,000 rides at $20. The consumer surplus with no medallion requirement would be areas A and B on the graph. The consumer surplus is define as the area on the graph above the equilibrium price and below the top of the demand curve. The producer surplus with no medallion requirement would be areas C and D. The producer surplus is defined as the area below the equilibrium price to the starting point of the supply curve. The economic surplus with no medallion requirement would be areas A,B,C,D.

With the medallion requirement, the equilibrium price would be $30 and the number of taxi rides produced would be 79,200. With the medallion requirement, the consumer surplus would be area A- less than the consumer surplus of A and B for the free market because the price is higher for the taxi ride. With the medallion requirement, the consumer surplus would be area B, C, D- the producer has gained B through the supply requirement resulting in higher prices. The deadweight loss with a medallion requirement is H and J: This is the difference between the equilibrium under the market solution and that under the command and control solution.

The taxicab drivers are better off in the aggregate with the medallion requirement; this is because the total revenue accrued to taxi drivers is more- and the limitation means they get paid more per tax ride. The consumers are worse off: This is because although the consumer surplus is A and B under the situation without medallions; under the situation with medallions consumer surplus is reduced to A and there is a dead weight loss of H and J.