Question: Now suppose that the city council of Metropolis decides to
Now suppose that the city council of Metropolis decides to curb congestion in the downtown area by limiting the number of taxis to 6. Applicants participate in a lottery, and the six winners get a medallion, which is a permanent license to operate a taxi in Metropolis. What will the equilibrium fare be now? How much economic profit will each medallion holder earn? If medallions can be traded in the marketplace and the rate of interest is 10 percent/ yr, how much will the medallions sell for? (Hint: How much money would you have to deposit in a bank to earn annual interest equal to the profit made by a taxi medallion?) Will the person who buys a medallion at this price earn a positive economic profit?
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