Taxicabs are a popular form of public transport in most countries. In a small city state like Singapore, there is a total fleet of 25,176 taxis operated by eight taxi companies as of May 2010 , collectively completing 588,632 trips daily across the island (June 2005).
A typical cab charges a fixed flag down fee of $2.8-$3 and a distance ($0.20 every 385 m) and waiting time based fee.
The obvious question that arises is, since taxis use an electronic mileage meter, wouldn't it be a lot simpler for the regulatory commissions to base fares only on the distance travelled.
There surely must be an economic rationale that justifies the multi-part tariff.
To stay in business, taxi owners must at least break even, covering all their costs.
Profit = Revenue - Total Costs
= PQ - Total Costs
where P is the average fee charged per ride and Q is the number of trips
Total Cost = Variable + Fixed Cost
= cQ + F
Some costs are roughly proportional to the distance travelled (say fuel, maintenance etc) but many others are not. Taxi operator licenses, Road tax (~6300 SGD/year) etc, are fixed costs irrespective of the distance travelled.
The most efficient taxi rate structure is the one that leads consumers to base their taxi use decisions close to the extra (marginal) cost incurred by the taxis to provide the use.
If taxis recovered all this cost using a single meter based fee, the per km rate would be significantly higher. This would discourage many long distance (high demand) users, even though the marginal cost (variable cost per distance) of serving them might be lower than what they were willing to pay.
Thus a rate structure with fixed and variable components closely mimics the actual cost structure that most cabs confront. By keeping the per distance fee lower, passengers are not forced to pay more than the actual cost of longer rides and does not discourage heavier users for whom the benefits exceeds the true cost.
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