Optimal Fare, Vacancy Rate, and Subsidies under Log-Linear Demand with the Consideration of Externalities for a Cruising Taxi Market

Externality is an important issue for formulating the regulation policy of a taxi market. However, this issue is rarely taken into account in the current policy-making process, and it has not been adequately explored in prior research. This study extends the model proposed by Chang and Chu in 2009 with the aim of exploring the effect of externality on the optimization of the regulation policy of a cruising taxi market. A closed-form solution for optimizing the fare, vacancy rate, and subsidy of the market is derived. The results show that when the externality of taxi trips is taken into consideration, the optimal vacancy rate should be lower and the subsidy should be higher than they are under current conditions where externality is not considered. The results of the sensitivity analysis on the occupied and vacant distance indicate that the relation of the vacant distance to the marginal external cost is more sensitive than the occupied distance. The result of the sensitivity analysis on the subsidy shows the existence of a negative relationship between the marginal external cost and the optimal subsidy.

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