Alan runs the only taxi service in town. Whenever he raises his fares above $.30 per mile, other taxi firms enter and compete with him to drive his fares back to $.30 per mile. Describe what kind of market Alan is operating in and if it is plausible that Alan might set his fare so as to achieve efficiency? Explain
Alan is operating in a contestable market. Entry is easy, and so, whenever competitors detect a positive
economic profit being made, they enter. It is plausible that Alan will set his fares at the competitive price
level, and so will achieve efficiency. This is because the threat of entry will force him to behave
competitively.
Economics
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