Paradoxical Taxi Fares

JULY 01, 1988 by JOSEPH S. FULDA

Joseph S. Fulda, a regular contributor to The Freeman, is Assistant Professor of Computer Science at Hofstra University and resides in Manhattan.

Often, I commute to work on Long Island in the wee hours of the morning via so-called gypsy cabs—the unlicensed taxis which abound in my section of upper Manhattan. A flat rate (usually $20.00 plus tolls) is agreed upon at the start of the trip and paid at its close. Most of the time, the story ends there.

Sometimes, however, when we pass the airport on the way, an argument ensues. The driver points out that the fare to the airport is more ($30.00 minimum), yet the cost of that trip measured in time and mileage is less. So, he concludes, he has been had, despite his agreement to the terms and a clear, initial bid on my part stating the time involved (45 minutes) and the destination (Hempstead in Nassau County).

Is he right or wrong? And why? The prime principle of economics is that prices are determined by supply and demand, not costs. Some products may cost a quarter and sell for a half-dollar, while others go for a dollar yet cost only a dime to make. The second producer is neither a profiteer nor an exploiter, and the first producer is neither a benefactor nor a patron. Both producers merely respond to market signals based on supply and demand.

To rerum to the taxi fare, the market price for a commute to the heart of Nassau County is indeed less than the market price for the shorter, faster trip—in the same direction—to the airport. That this is so is evidenced by the very facts of the case: I can always obtain a taxi at the lower rate for the longer, slower trip.

Why this is so is a bit more subtle. A taxi is the only sensible means of travel to the airport, especially during the wee hours of the morning. Commuting, on the other hand, can easily be accomplished by rail—much slower, yet much cheaper—or by car pools with other early birds. Moreover, people are willing to pay more for an occasional trip, when loaded down with baggage, than when they must make the trip several times a week. Furthermore, the number of gypsies emptily speeding about during these hours is very high. Many drivers consider themselves lucky to get any substantial fare at that hour; a few have even suggested a regular contract!

Put in economic terms, the demand for cabs at the time I commute is very low, especially for commuter trips. The choice facing a would-be supplier is often not an airport trip or a commuter’s trip, but a commuter’s trip or no trip at all (or perhaps a few local trips). Later in the day, during rush hour, when the demand for taxis is far greater, the gap between airport fare and a commuter’s fare narrows, for the demand for taxis is far closer to the supply of taxis available for hire.

The law of supply and demand can sometimes appear to have paradoxical results, but if one truly understands the principle and also knows the market situation involved, the paradoxes disappear.


July 1988

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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