The "Taxicab Problem": A Proposed Solution

A widely admired part of Milton Friedman's Price Theory: A Provisional Text (1962) is an Appendix containing seventeen problems of delightful subtlety. Of the seventeen, the most discussed is probably the one on taxicab licensing. I have assigned this problem several times on take-home examinations and as a term-paper topic. Students invariably find the conditions of equilibrium in the taxicab market hard to characterize, and conversations with colleagues reveal that the conditions are in fact elusive. It is fitting that the taxicab problem be given its due notice in this new section of the Journal, and I hope the solution proposed here is found to be correct.1