How to Regulate Cabs
There’s an interesting discussion going on in the comments section at Greater Greater on whether, or how, taxis should be regulated. In part, the question hinges on how an area perceives the cab service — as purely a private business or as a piece of public infrastructure, akin to bus networks. There are good reasons to feel it’s at least somewhat the latter, and certainly there are characteristics of both, but for now, cabbies are private operators, so we’ll deal with them in that fashion.
There are really two regulatory questions, then. One concerns ease of entry; the other, pricing. If you restrict entry into the profession, then other things equal the cost of a cabbie and a cab ride will go up. That’s why cabbies prefer to restrict entry into the profession. You also reduce the quantity of service, with negative effects for riders. On New Year’s Eve, for instance, it’s impossible to get a cab. If anybody out there could act as a cabbie whenever they wanted, charging whatever they wanted, then catching a ride wouldn’t be a problem on such occasions.
There are obvious downsides to such a system, however. The biggest one is that riders don’t have very good information about the intentions or reliability of unregistered drivers. More importantly, riders are extremely vulnerable once in a cab. In many cities, then, we see illegal cabs operating, suggesting that registered cabs don’t fully meet the desired market for hired cab services. Authorities warn against using them on safety grounds, however, and it’s not clear whether free entry would unambiguously improve social welfare. What we can say, is that cab drivers and companies should not be placed in charge of determining rules for entry. In such a case, they clearly maintain market power and can excessively restrict the number of cabs out there.
For fares, there are also positives and negatives to regulation. On the negative side, set fares can lead to a net shortage or surplus of cabs at any given time, as well as a poor geographical distribution. These issues force regulators to add additional rules, concerning what destinations and riders must be served, lest those areas go chronically ignored. On the positive side, set fares reduce transaction costs and uncertainty, and meters provide security that the set fare is being adhered to (folks don’t like to feel as though they’re being cheated). It’s hard to know, but I suspect that those cost reductions significantly increase demand for cab services, such that in the total absence of government intervention you’d see private efforts to coordinate a fare structure (though that would also raise the prospect of market power and pricing).
I know the standard economic model would say first use no government, but given a cursory glance at the market, it’s not clear that much is to be gained from wholesale deregulation. So long as cab companies aren’t restricting entry and governments are looking for the minimum necessary requirements the market should operate in a pretty healthy manner, and fares are going to be largely coordinated anyway, so they may as well be standardised. If too few or too many cabs becomes a problem, the solution is simple — change the price.
I’m open to other interpretations, however.
January 5th, 2009 at 6:32 pm
Why isn’t the pricing problem the same as it is everywhere else? How do you suggest the pricing board set the standard price for cab services? The disadvantage of government regulation of prices is that the common fare won’t be set by the market, but rather by the relatively-information starved regulator (and, one might add, the likely captured by taxi groups, as they would be the only easily-organized group interested in lobbying).
One answer to this problem would be an optional common price/quality standard. (But not one without rewards — cabs that reach the standard can be yellow, perhaps, while other cabs could not be). Thus, there would be price pressure on the common standard, as if the standard setting board did not promote a competitive price, rides would be stolen by unregulated hack cabs. Yellow cabs would hence lobby for market level prices and hopefully they would be achieved.
One other piece of the puzzle is that local governments get large amounts of revenue from selling taxi medallions. Although this is wholly inefficient, its inefficiency needs to be judged against the inefficiency of other taxes and the value of local services (it is still likely inefficient to regulate cabs, but it should be taken into account).
January 5th, 2009 at 6:32 pm
In general I agree, but it is nice in other countries where there are accessible “illegal” car services.
In Moscow, for example, you can easily flag down a car on the street for a fraction of the price of an official taxi. These cars are either illegal cabs, or just people driving along willing to give someone a ride for some extra cash.
Safety is a concern, but those willing to pay more can go with the official taxis. It’s not an ideal situation, but preferable to a system in which cab drivers/companies have too much market power.
January 5th, 2009 at 6:53 pm
David,
If we take as our comparison point a piece of public infrastructure, like roads or a subway system, then it should be possible to create a metric for cab availability and target fares at achieving that metric. This is what we do with congestion tolling, more or less. Cab companies do have an incentive to lobby for their preferred fare, but as recent metering battles have illustrated, the public is not shy about making its voice heard on fare matters.
It’s a weird market, and it’s certainly possible that good deregulation (I like your proposal) would wring more surplus out of the system, but I don’t think it’s self-evident. Another thing to consider — there may be value in having a similar structure, if not identical fares, as in other cities, whether or not that structure is optimal.
January 5th, 2009 at 8:54 pm
There’s a case for market failure when it rains.
January 6th, 2009 at 1:48 am
Really? I have trouble understanding why there shouldn’t be entry, that is why we shouldn’t permit non-taxis to provide taxi-like services. But we generally don’t.
I’m not sure why would that be the comparison point. Subway systems are natural monopolies (there are extreme increasing returns to scale), and roads are public (or public-y) goods — difficult to price by ordinary mechanisms. So we accept second best measures. (Also, although the public occasionally gets involved in these debates, it’s not like Mancur Olson suddenly becomes irrelevant when we start talking about meters.)
The last point is interesting. But I still don’t see the case against allowing the development of a competing industry (cheaper, less nice cabs that charge less).
January 6th, 2009 at 10:06 am
Having a theoretical discussion on taxi regulation is an exercise in futility. The harsh reality is that the industry is corrupt. The commission is a total joke, CMs are on the take, and riders are completely ignored.
Exhibit one is that completely embarrassing report that Graham put out a month or so ago.
Cab service in DC is a perfect example of how when economics and political science collide, its often political science that wins. (of course, those darn economists won’t ever admit defeat and they’ll just say the failed political realities are simply the result of rational choices!)
January 6th, 2009 at 2:37 pm
Reid nailed it. Nothing will change until the taxi cab commission is gutted, overhauled, sown with salt, gutted again, and the entrails burned. It is composed of taxi company owners and dependents and exists for the sole purpose of preventing competition from out-of-town taxi companies, stifling innovation, keeping old rustbucket polluting cars on the street as along as possible, and removing any fragment of accountability from the system. It’s the taxi industry’s mouthpiece. Nothing more.
Welcom back to hell, Ryan.
January 7th, 2009 at 1:21 pm
I think you underestimate the taxi commission’s true goals. They are much more nefarious and include: Total world domination, giving people “the gay”, dressing monkeys like people, the end of thin mint cookies, and (most disturbingly) 24-hour Pussycat Dolls radio. All run from their secret underground lair.
January 7th, 2009 at 5:05 pm
I wouldn’t oppose any efforts to root out corruption in DC govt and the taxi companies, but I think I’d put taxicab reform lower down the list now that we’ve gone to a meter system.
First, as a consumer, with fares on downtown-uptown/visa versa down a good 2 bucks (and the gas surcharge gone), it’s a better deal now — when traffic’s light. But that’s rarer and rarer. And when I’m in a cab stopped at a green light because of insane traffic at an hour that traffic shouldn’t, theoretically, be that bad, I feel even more like a fool for taking a cab as I watch the meter tick (although the fares in bad traffic in my experience are still about on par with zone-era fares).
Bottom line, if it’s only a 50/50 chance at best that a cab will save me time getting downtown anyway, then I’ll probably just be that much more vigilant about keeping a bus schedule in my pocket and timing my travel more carefully. And the main issue for me will be making sure we have reliable buses and metro.