In most big cities, taxicab fares are fairly standardized, and they are regulated by local governments. For the sake of simplicity, assume that a cab driver works for a licensed taxicab company, and he or she pays a fixed daily fee for the use of the taxi; all fares and tips go to the driver.
a. In Atlanta, Georgia, meter rates are $2.50 for the first 1/8 mile and $0.25 for each additional 1/8 mile. What are the benefits of allowing cab drivers to charge fares based on the number of miles driven? In other words, what good behavior is encouraged—or what bad behavior is discouraged—by this? What are the possible drawbacks?
b. In addition to the meter rates, there is a $21 per hour waiting fee. Why do you think there is a waiting fee? If cab drivers could not charge a waiting fee, how might that change their behavior? What if cab drivers were always just paid an hourly wage of $21 per hour? What would be the benefits and drawbacks of this payment scheme?
c. For some fairly standard trips in Atlanta, there are flat fees. A trip from the airport to anywhere downtown, for example, is always $30 (plus $2 for each additional person). What are the potential benefits and drawbacks of this kind of compensation scheme? Why might a city require this payment scheme for trips from the airport?
d. In the chapter, we talked about the importance of the gap between what you pay for and what you want. What is it that Atlanta’s City Council and taxi customers want from the cab drivers in Atlanta? Which basis for cab fares (miles, hours, trips) comes closest to closing the gap between what is wanted and what is paid for?