ABSTRACT
In this chapter, the authors show how policy analysis can bring together the theories of market and government failure. Taxi fares in Madison are well above the national average for cities of comparable size. The primary reason for these high fares appears to be that taxi regulation by the City of Madison restricts entry to the taxi market. Instead, consumers accept rides from the first taxi that appears. Because in this situation taxi users have a very limited basis for judging the safety and quality of taxi service there is asymmetric information in the market. Commentators on Madison's taxi market agree that the city's current regulations create significant barriers to entry. Many state and city governments have recognized the benefits of taxi service and have adopted various forms of licensing and more extensive regulations to address perceived market failures. Taxi companies and drivers cannot charge an amount different than the posted fare.
