Nobody wins when there are too few taxis

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Most bad economic policies can be abandoned, but the harmful effects of restrictive licensing systems are usually irreversible. By illustrating the flaws of taxi regulation, John explains why governments and licensing authorities should think twice before being caught in a transitional gains trap.

There are good arguments for regulating taxis. We are especially vulnerable when we jump into someone else’s car; we warn children sternly against it. We frequently use taxis where we do not know the geography and have no previous experience to tell us what is a reasonable price.

But if regulation is introduced, usually to protect vulnerable consumers, there is always pressure to extend its scope. Regulation creeps. Rules to exclude criminals and prevent fare-gouging are necessary. But limits on the number of taxis allowed to ply for hire are not. Britain’s Office of Fair Trading has just completed a review of this practice and its conclusion is that taxis are neither better nor safer because there are fewer of them. They are just more expensive, and harder to find. The dearth of closely regulated taxis is partly met by the emergence of less closely regulated private hire vehicles: fine if you are a local resident and have made plans in advance, less satisfactory for tourists or those who want to flag down a taxi in the street – or a business seeking to offer a readily available, high-quality taxi service.

About half the taxi licensing authorities in Britain limit numbers and almost all of them have long waiting lists. Similar restrictions are common around the world. In New York, the number of licensed cabs has remained almost unchanged, at about 12,000, since the first controls were imposed more than 60 years ago. The main reason these restrictions exist is that taxi drivers are organised to lobby for them but passengers are not organised to lobby against. The bane of a cab driver’s life is time spent driving an empty vehicle. If supply were better adjusted to demand, he thinks, the meter would always be turning and there would always be an audience for his opinions on the state of the world.

Yet the effect of quantity limits is not as simple as the cabbie thinks. When licences are restricted, they acquire value. The medallion required to operate a New York yellow cab changes hands for about $250,000. In Britain, trade is frowned on but nevertheless widespread. It is said that Calderdale in Yorkshire has Britain’s most expensive taxi licences; and if you want to drive a cab in Crawley or Wycombe you may have to invest up to £50,000 ($92,000).

The potential profit a taxi driver might derive from restrictive licensing through higher fares and fuller cabs is absorbed in the costs of servicing the loan needed to acquire the licence. Today’s taxi drivers are no better off than if restrictions on numbers of cabs had never been introduced. And the value of the licence is a measure of the amount by which their passengers are worse off. If drivers did not have to pay this levy, there could be lower fares and better services.

If drivers do not gain, and passengers lose, who does benefit from quantity licensing? The gains go to the people who were in the business when the restrictions were introduced, or started to bite. As demand for New York cabs increased, but supply did not, the value of a medallion increased steadily. A New York owner driver who began work after the second world war and retired in the 1990s could have derived a retirement income simply from his accumulated capital gains. But now he has spent the money, and it would be neither fair nor practicable to recover it from him. The New York City cab trade cannot now be deregulated because to do so would wipe out the savings of owner drivers and the investments of people who lease medallions. At first sight, phasing out of regulation might seem a way ahead. But who would want to buy an asset certain to depreciate? The outcome might be little increase in supply but large losses to incumbent operators.

In Dublin, where rapid growth had led to acute shortages of taxis, the ingenious solution was to give new licences to established operators to sell to new entrants. This moderates the problem but still does not eliminate it.

Most bad economic policies can be abandoned. The pernicious nature of restrictive licensing systems is that their malign effects are irreversible. This has earned for such schemes the label of the “transitional gains trap”. Governments and licensing authorities should think twice, and better, before they introduce such policies.

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