The number of taxis on the street is strictly limited by licenses by a government agency that also sets taxi fares. Since deregulation, other transportation costs have fallen and their service has improved. In contrast, taxi rates have become more expensive and the number of taxi licenses has not changed in decades. The value of a single taxi license is now worth about $350,000 and taxi service complaints are common, especially on the weekends.

(a) Use an appropriate economic model and analysis to explain why these taxi licenses can take on such high values.

(b) A new internet ride-sharing service called Uber is ready to offer rides through a cellphone app. Where Uber already operates in the U.S., their rates are lower than the regulated taxis fares. Use an appropriate model to explain the likely impact of Uber on the value of the regulated taxi licenses.