I disagree: the number of cabs in circulation is a complex function of the market, but the ideal number of cabs is straightforward to calculate but won't be found by the market.
Why not? Given the choice between an optimal number of cabs (fully utilized) making a larger profit and an excessive number of cabs (underutilized) making a tinier profit, the market will always choose the latter. Markets will tend to attract competitors and thus supply until profit margins drop to near zero. In both cases prices are the same, revenue is the same, but in the latter case the pie has more slices, increasing congestion. There is less profit per taxi in the latter case, especially if prices drop with increased competition, but as long as there is at least an iota of profit, the number of cabs will not decrease to the most efficient level.
Taxing congestion itself is a good idea generally, and helps increase road efficiency, but this won't result in the optimal number of cabs, either. It will result in increased prices which will cut demand and thus supply, but given this new demand, it won't magically remove competion such that fewer cabs are servicing more passengers, relatively speaking. The number of cabs will still remain at the maximum number possible while still remaining profitable. For any given cab, the amount of time spent idling is still the same--too high.
Why not? Given the choice between an optimal number of cabs (fully utilized) making a larger profit and an excessive number of cabs (underutilized) making a tinier profit, the market will always choose the latter. Markets will tend to attract competitors and thus supply until profit margins drop to near zero. In both cases prices are the same, revenue is the same, but in the latter case the pie has more slices, increasing congestion. There is less profit per taxi in the latter case, especially if prices drop with increased competition, but as long as there is at least an iota of profit, the number of cabs will not decrease to the most efficient level.
Taxing congestion itself is a good idea generally, and helps increase road efficiency, but this won't result in the optimal number of cabs, either. It will result in increased prices which will cut demand and thus supply, but given this new demand, it won't magically remove competion such that fewer cabs are servicing more passengers, relatively speaking. The number of cabs will still remain at the maximum number possible while still remaining profitable. For any given cab, the amount of time spent idling is still the same--too high.