Friday, October 3, 2014

Deregulating the Taxi Market for the Sake of Market Competition Would Be Uber-Nice

It's nice to see when economists can have a consensus on something, especially since it seems like such a rarity these days. I was interested to see that a group of economists recently came to such a consensus in taxi competition, of all things. Until recently, I honestly didn't know this was such a hot-button issue, at least hot enough where there were protests going on because of it. Apparently, this company called Uber started up back in 2009 and picked up steam at the end of 2011. The reason it gained such popularity is because it is an on-demand ride-sharing service that uses a smartphone app to connect passengers to private drivers. Not only does the convenience of Uber make it an attractive service, but Uber also charges low fees for their service. While this might sound like a wonderful innovation, not everyone is happy, most notably the taxi drivers who are in the traditional taxi industry. Why? Because they feel as they are losing business and being undercut in the process. Are companies like Uber fair to the hard-working taxi driver trying to make ends meet? Should we allow such price-based selling to exist? And if it's so awful, why have economists developed a consensus that taxi competition is a good thing?

In all honesty, these are the wrong questions to ask. The question I have to ask is "Why is the government so heavily involved in the taxi industry the first place?" I can tell you taxi regulation is nothing new; it can be dated back to the mid-nineteenth century because a lack of regulation would have meant "resulting in a lower level of service to the customer." Whether it's because the government wants to control emissions, ensure public safety, provide high-quality services, or to prevent price gouging/surge pricing, the latter of which is something with which I do not have a problem in the first place, taxi industry regulation is an age-old, textbook example of the "Government knows best" mentality. But does it really know best?

The taxi industry has all sorts of regulations (take a look at New York City's regulations as an example of how convoluted it is), but one of the bigger issues I have with it has to do with barriers to entry in the taxi market. I can tell you right now that I am not a fan of occupational licensing because it creates too many economic inefficiencies and harms so many people either looking to enter a business or stay in a business. Some states require drivers to hold commercial insurance. In some cities, if a prospective taxi driver wants to obtain a license, that individual would need to lease or purchase what is called a taxi medallion. In Chicago, taxi medallions start off at $360,000. In the Big Apple, they cost over a million dollars! Talking about a barrier to entry! The medallion system also constrains supply of taxis by putting a limit of the number of medallions out there. And don't forget that the taxi driver needs a special driver's license, which requires a mandatory class and a test. Minimum-fare rules don't help, either. In Tampa, for instance, sedan and limo drivers are mandated to charge a minimum of $50 for their services, regardless of distance. Basic economics dictate that enacting a price floor below the equilibrium point, much like we see with minimum wage, creates a shortage.

[Side note: In case you were wondering how Uber is legally able to get away with this in the first place, medallions only apply to cars that pick up hail passengers, not general car services.]

The fight against ride-sharing companies like Uber, Lyft, and Sidecar has nothing to do with "general welfare" and has everything to do with protecting the taxi cartel, or to put it in political science terms, this is a clear case of regulatory capture. Yes, deregulating the market would be bad for current taxi drivers. That is because they would no longer be sheltered from the competitiveness in a relatively free market. It means that taxi drivers can no longer lobby the government and partake in rent-seeking to protect them from market forces. They would actually need to compete with services like Uber and stop antiquated practices like using meters. If the taxi driver is incapable of innovating and adapting current practices to the changing times, then that taxi driver should no longer have a job.

Before thinking that I am too callous, think of it this way: Henry Ford invented the automobile about a century ago. This eventually put workers in the horse carriage industry out of a job. Looking back, we don't think to ourselves, "Oh, those poor workers." We think to ourselves, "Wow, aren't we much better off because of the automobile?" If we went with this preservationist, protectionist "government knows best" mentality back in the early twentieth century, we would still be getting around by way of horse-drawn carriages.

People think that if the government is not involved, there would be no regulation. That is a fallacy commonly applied to free-market ideas. Rather than have the government regulate the market, the ride sharing companies would self-regulate. To illustrate but one example, Lyft has a driver rating system. If the driver consistently gets lousy reviews, no one will select that driver. Because such transport is no longer based on "grab the first cab you can hail," you can be more selective about the service you have (read: greatly reduced information asymmetry), which means that market forces such as pricing, competition, and profit incentive are very much in force with the creation of such ride-sharing companies.

Even back in 1984, the Federal Trade Commission wrote a report back then finding that most taxi regulations are bunk (p. 155). This is even truer in 2014 when we have technology like Uber to provide us an innovative way to make traveling by car cheaper and more convenient, not to mention increase economic profitability. Uber has quite literally become a game-changer. No wonder economists are on board with taxi innovation! We, as a society, should advance business models that encourage innovation, not discouraging it. Provided it does not violate the nonaggression axiom, people should be able to voluntarily choose whichever form of economic activity they want, and that includes using Uber. I wish companies like Uber the best of luck in being innovative and showing that once again, the innovation from a competitive market system is downright superior to the stifling bureaucracy and onerous regulations which government enacts all too frequently.

10-28-2014 Addendum: Here is a policy brief from the Mercatus Center about the advantages of liberalizing the taxi market.

8-21-2015 Addendum: I found a study showing that ride-sharing services like Uber reduced the motor vehicle homicides by 5.6 percent in the state of California since inebriated individuals have a better way of getting home.

3-16-2016 Addendum: Another joy of Uber: it carries more passengers per mile or per hour than taxis do.

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