Ride-Sharing Companies Strike Blow Against Cronyism and for Free Enterprise

Published June 20, 2014

The state of Virginia has stepped up its attack on ride-sharing services Uber and Lyft. It’s just the latest example of crony capitalism and government favoritism toward the wealthy and powerful.

“Earlier this year, Virginia officials slapped the app-based services with more than $35,000 in civil penalties for operating without proper permits. On Thursday, Richard D. Holcomb, commissioner of the Virginia Department of Motor Vehicles, sent a cease and desist letter to both companies,” the Washington Post noted a few days ago.

The opposition of Holcomb and regulators in other states and municipalities makes about as much sense as trying to crush automobiles in favor of horses would have made in 1900. Uber, Lyft, and similar services have developed a new business model based on smartphone technology. It enables nearly anyone with a car to give rides to others, and taxi operators and their regulators are coming together to crush the upstart competitors.

“Regulatory capture” is the term economists use to describe regulators who see their job as, first and foremost, protecting the businesses they regulate. The regulated capture the regulators. To a large extent, that’s what we have here. In addition to Virginia, regulators in cities and states including California, Illinois, Maryland, and Pennsylvania are threatening the ride-sharing services with fines or regulations that would make it almost impossible for them to stay in business.

The opposition is international. Taxi drivers in many European cities recently used their vehicles to snarl traffic to protest Uber and Lyft.

Here’s what they’re so afraid of: The services link people who own vehicles and want to give rides to people who need rides. Uber and Lyft do not own the vehicles or supervise the conduct of the drivers. Users of the services like them. They often receive quicker responses than from traditional taxi services, and the vehicles are usually cleaner and often have amenities such as bottled water or chocolates or mints for passengers.

Because users can immediately rate the quality of the service they receive, the ride-sharing apps give drivers a strong incentive to be prompt, courteous, and clean. When people call for a ride, they can see the ratings other people have given the driver who is coming to pick them up and cancel the ride if they dislike what they see. Too many poor ratings, and drivers are dropped from the services.

And in another good twist, drivers can rate their passengers. Rude, unruly, drunk, or otherwise boorish passengers may not get picked up again.

There are no set fees. Lyft drivers accept donations, and Uber drivers receive a percentage of a fee that floats with demand for rides.

Compare this to the taxi services in most major cities, where the prices are fixed regardless of demand, the taxis are sometimes smelly or dirty, and the costs and bureaucratic hurdles to go into business against the established taxi companies are monumental.

Last November New York City held its first taxi medallion auction in five years. No taxi is allowed to operate without a city-issued medallion. The New York Times reported the auction results: “On Thursday, at the city’s first medallion auction in over five years, the largest bid for a ‘mini-fleet’ of two medallions exceeded $2.5 million, by far the highest ever recorded. At the last auction, in 2008, the high bid on a similar package was a little over $1.3 million.”

Imagine having to spend more than $2.5 million just to win permission to run two taxis in New York. This shows what a protection racket for the established companies taxi regulations have become. Costs are outrageously high in other cities as well, which explains why taxi rides cost so much. The profits pour in to the owners and managers of the taxi companies, while the drivers receive a relative pittance.

The taxi companies fear losing customers to Uber, Lyft, and similar services; the regulators fear losing control over the taxi industry; and the politicians fear losing the political clout that pulls in campaign donations and electoral support from the taxi companies.

Many taxi drivers no doubt resent the difference between their paltry paychecks and the fat profits their companies make. Uber and Lyft give these drivers the chance to use their personal cars to become their own bosses.

In doing this, they’d strike a blow against their taxi company bosses and the political bosses who have been strangling competition and free enterprise.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute in Chicago.