According to reports in the Chinese media, commuters in Beijing are facing a somewhat paradoxical situation: they find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen. Government-determined gasoline prices have also increased. But the government, worried about rising prices, has left the fares cabs can charge their customers unchanged.
a. Use supply and demand curves to explain what has happened in the market for cabs in Beijing.
b. Based on your understanding of how the invisible hand works, what do you think should be done to correct this problem?