Question

Taxi drivers are perfectly competitive firms facing constant or decreasing returns to scale. Many of them complain that their profits are eroded because of ‘robot taxis’ that pick up fares but often do not follow the same rules. What happens to profits when they petition the government to issue ‘red plates’ and crack down on illegal taxis so they do not have to compete with ‘robot taxis’?

Answer 1

Since in a perfectly competitive market there exist a large number of sellers who sell a homogenous good so that they do not have any affect on the market price.

In this case,when the taxi drivers petition the government to ban illegal taxis then the market supply will fall which will increase the market price and losses will decrease and this process will continue when the market price rises to zero profit level so the taxi drivers will be earning zero profits in the long run.