In this paper a diagrammatic approach is developed to analyze the characteristics of the cruising taxi market. With this approach social optimum conditions, short and long run free market outputs and a second best solution with financial constraints (non-negative profits) are analyzed. Different system conditions are described in terms of number of taxis in operation, number of runs produced, fares charged, average production costs and generalized prices. Using system average production costs and demand functions expressed in terms of generalized prices, short and long run adjustment processes are described, to explain the market mechanisms that produce such system conditions. Thus, we derive short run and long run quasi-equilibrium conditions. We show that the maximum fleet size is obtained for free market conditions, and that the social optimum is characterized by producing the maximum number of runs with a fleet of taxis of lower size than those obtained with short and long run free market conditions. We show that price regulation allows to obtain a social optimum or a second best solution and that entry regulations are in such case redundant. On the contrary, entry regulations alone (without price regulation) that reduce fleet size, with respect to the free market case, produce worse system conditions than free market. Finally, we show that licensing policies can contribute to improve conditions generated by entry regulations, bringing them closer to the social optimum.


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