Free-Market Reforms Benefit Taxi Customers, Economy

Published November 5, 2014

For decades, urban dwellers and tourists have been forced to rely on taxis to navigate their cities. These days, however, hailing a stranger in a cab or calling a dispatcher is an unnecessary hassle. New technology allows customers to download a smartphone app that—with the push of a button—will dispatch a vehicle and driver to their exact location.

GPS technology ensures that not only do drivers know exactly where to go, but customers can see them coming and know exactly when to meet them. Who could object to such a convenient invention? The answer, unsurprisingly, is traditional taxicab and limousine services.

The taxi industry is heavily regulated, with steep barriers to entry. In many cities, a special license, called a “medallion,” is required to operate a cab. One may purchase a medallion from an existing owner, usually for an exorbitant price. In New York City, the price for a single medallion is often in excess of a million dollars.

Whining, Not Winning
Companies such as Uber, Lyft, and Sidecar are attracting customers away from traditional cabs, by offering lower fares and greater convenience. Instead of competing with new firms in the marketplace, the “old guard” is running to City Hall, demanding local regulators shut the new competitors down, claiming phony concerns about public safety.

However, the market already incentivizes quality and safety, and it is reflected in the how these businesses operate. Lyft, for example, requires all vehicles to be part of the 2000 model year or later and pass a 19-point inspection test. Drivers must carry excess liability coverage of one million dollars and an uninsured- and underinsured-motorist policy of one million dollars.

The strongest incentive for quality, however, comes from letting customers rate their driver.

Bad taxi drivers, by contrast, hurtling down the road at breakneck speeds while weaving through traffic, are the butt of many jokes. Even when the driver’s name and license number are displayed, calling a cab company and lodging a formal complaint is a hassle for most customers.

By allowing customers to rate drivers instantly, however, the new companies make the complaint process easy. Drivers with bad ratings are automatically excluded from the system, placing a great deal of power in the consumer’s hands.

Erasing the ‘Red Line’
Finally, it is an all-too-common problem that members of some low-income or minority communities experience difficulty hailing a cab. Existing regulation makes this problem worse.

When customer demand exceeds an artificially constrained taxi supply, drivers can arbitrarily decline minority customers, certain they can quickly find another paying customer quickly. With Uber and Lyft expanding number of vehicles in operation, it is much more costly for a driver to turn down a fare. By increasing competition, taxi deregulation forces expansion into underserved communities.

Taxicab regulation benefits license owners at the expense of consumers, whereas allowing free-market forces to work within the industry leads to cheaper fares and happy customers.

Stewart Dompe ([email protected]) is an instructor of economics at Johnson & Wales University.

Internet Info:

“Regulation of Platform Markets in Transportation,” Stewart Dompe and Adam C. Smith, Mercatus Center: