In a city, the Taxi industry is regulated by the Government Taxi Authority. A company can only supply taxi services, if it is issued a licence by the Government taxi Authority. (Note: A licence does not place a limit on the number of taxi trips a company can supply.) The market for taxi trips in City has the following characteristics: Inverse demand for taxi trips is given by the function, P = 90 − Q/ 1000 In this equation, P is the price of a taxi trip, and Q is the total quantity of taxi trips supplied by licensed shuttle taxi companies. The marginal cost, to a taxi company, of supplying a taxi trip is $18. A taxi company’s only fixed cost is the cost of purchasing a licence from the Government Taxi Authority.

Question

Explain why the Government Taxi Authority has an incentive to only issue one licence. What problem does the Government Taxi Authority create if it only issues one licence?