arm chair economics

Keynesian economics is pretty simple. Increase in supply reduces price and increase in demand puts upward pressure on price and vice versa. I have long been a quasi capitalist in that sense. I have believed that the market forces will make most things work and that town planning, zoning etc etc must think about market forces. Today while I was doing some random thinking about taxi stands I figured something that apparently contradicts market forces.

I hate taking the taxi at the arrivals at mumbai airport. With the airport being in the process of a getting a facelift, the taxi stand is better managed than it was before. There are no shortages of taxis at any point at the taxi stand, at any time of the day or night. There are tons of taxis in a line. In fact when the airport was being renovated the airport authorities had a smallish run in with the taxi union on parking space for the taxis. The Airport wanted fewer taxis to be parked than currently. Talking to the taxi drivers one realizes that there are clearly a glut of taxis waiting at the airport. In fact the taxis at the airport are specialists and run only from eth airport to wherever you want and they run back as soon as possible and get into the line again. In a shift of 12 hours the general consensus is that the taxi gets around two to a maximum of four passengers. Giving that the waiting time is large the average taxi can’t really get along with short fares and normal fares. So they normally doctor the meters to show a higher fare. And invariably after they realize I am a local and a regular (in other words I know the fare), they ask to pay whatever I think is right. Obviously hoping for a little more. The ricks are also the same. In fact I am still a good 150 bucks from the airport. The guys who stay very close to the airport have a tough time trying to persuade the cabs to get him home. If you actually analyze the situation, simplistically, there is upward pressure on fares due to a glut of supply. Here over supply and the resultant longer waiting lines create a contradiction of supply actually increasing the price. So theoretically if we were to regulate the number of taxis (the hand outside of the market forces) and reduce the number and therefore waiting time, we would actually get the price pressure down in this situation. Reduction in supply reduces prices here to an optimum number, till a point after which the prices would again go up due to shortage. These are some queer v shaped curves in operation here. There are obvious holes in the economic theory where in other forces must be constant and fair, like doctoring fares and taxi meter pricing and not free market forces pricing etc etc… the same logic I would also like to apply to prepaid taxis which generally charge a premium over the normal fares. If there are a large number of taxis then prepaid taxis must get cheaper, therefore resulting in lesser taxis and therefore lesser waiting time for the taxis and therefore higher return on time for the taxis that are actually ready to go at cheaper fares. That optimum number is obviously elusive but can be scientifically brought down to a range that can shift during the day depending on the study of load conditions. So the interfering hand in market forces is actually a good thing.

There are lessons to be learnt everyday…..