Fixing the number of vehicles and/or setting a tax for ride-hailing? Insights from a social welfare maximisation approach

Abstract

A social welfare maximisation problem is developed, in order to determine the optimal number of vehicles and the optimal fare of a ride-hailing service. The solution is compared with the one that maximises private profit only. External costs of traffic are included into the social welfare framework. It is found that the optimal solution depends on two colliding forces: users waiting time, that pushes to increase driver supply in order to for the users of the service to wait less time, and the existence of traffic externalities such that congestion, pollution and crashes, which pushes to reduce driver supply and increase fares. Optimality rules are analysed on first-best ground and second-best grounds, after introducing a constraint on the minimum wage that drivers could received. The problem is numerically solved with data from Germany and Chile, in order to estimate the relative weight of the aforementioned effects in a range of alternative scenarios regarding input parameters.