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The uneasy case for deregulating taxis

Increased user charges on vehicles and increases in carbon-based fuel prices might have long-term effects of reducing private car ownership and use – there are tentative signs that this has already happened in the US in response to the recent oil price boom.  This might encourage some commuters to shift towards mass transit for many trips and to the use of taxis for very specific short journeys. An efficient taxi service (and, indeed, an efficient car rental services), are an increasingly important adjunct to overall transportation sector reform.It goes without saying that user charges on motorists that reflect travel related externalities should apply to the externalities generated by taxi services.

The supply of taxi licences in all states of Australia is set by State and Territory Governments. The resulting limitation in supply can create monopoly power in the hands of the taxi industry which potentially creates inefficiency costs in the form of deadweight losses.   The difficulty for governments is that taxi licences they have issued acquire a scarcity value and are held as legal, income-earning assets. 

Victorian taxi licences are, for example, traded on the National Stock Exchange. In February 2009 they traded for $430,000 per licence. 

If governments sought to respect the asset values created by the licence system they could deal equitably with licence holders, and eliminate the deadweight losses associated with the alleged monopoly power in this industry, by buying back the licences at their market value.  Victoria has 4,652 metropolitan, urban and country taxis so that buying these licences back at the quoted figure would cost $2b.   The comparable cost in Sydney with 6,420 taxis and at market values around $375,000 would be worth $2.4b. Comparable costs in Brisbane would be $1.3b, in SA $0.3b, in WA $0.4b and in the ACT $0.1b. Achieving this type of reform throughout Australia would be an expensive once-and-for-all exercise that would cost in excess of $6.5b (private industry sources).   If the buyback was seen as a payment to eliminate the present value of annual deadweight losses then, at a 5 per cent interest rate, these gains from reform would need to be more than $309m annually across Australia to make the buyback worthwhile.

The buyback clearly represents a huge cost – it represents the present value of the profit stream associated with the current licence system and this will exceed the value of the present value of the deadweight losses. Government, in law, may even be able to abolish licences without compensating licence holders though there are strong moral and equity arguments against doing this. The issue here is whether a licence is a property right or not – in Ireland compensation was seen not to be a legal requirement because taxi licences were issued subject to the proviso that government policy might change in the future (Seibert, 2006).  The law has not been tested in Australia.

There are persistent (although inexplicable) concerns by politicians and regulators with ‘low’ driver incomes in the taxi industry and these too limit the possibilities for reform.  Thus although the industry is seen as having monopoly power drivers are seen as being employed in competitive markets for relatively unskilled labour so that incomes are pegged in these markets. These incomes are typically determined by bailment arrangements between licence holders, operators and drivers with the latter receiving as income 50 per cent of all revenues and owners paying all operational costs such as petrol and taxi maintenance costs. Driver incomes are therefore determined in these markets at competitive levels leaving any monopoly rents accruing to licence holders and to a less extent taxi operators.  Drivers can boost their incomes primarily by working longer hours. There is evidence in some jurisdictions (such as New York) that drivers ‘target’ certain income levels by adjusting their working hours (Köszegi & Rabin, 2006).  In this case pressure on incomes due to entry into the industry would be met by increased working times and perhaps by extra demand for services due to reduced waiting times.

Taxi industry deregulation is often advanced as a way of removing the deadweight losses although the empirical effects of deregulation of the taxi industry in other countries are fairly ambiguous (Small and Verhoef, 2007, 213-214).  Loosening entry requirements and price controls has led to significantly more taxis operating although fares have often not declined as expected. Service quality in terms of access times has sometimes improved but has also sometimes deteriorated in terms of no shows and refusals. Productivity often declined as cabs spent more time waiting at ranks or cruising for business. Overall a disappointing finding in centres where the taxi service has been deregulated is that little strategic innovation has occurred. Developments in telematics might eventually make such innovation more likely.

My instincts here are that although the industry acting cohesively as a whole does have monopoly power that there is enough competition within the industry to keep prices at reasonable levels.  Under the bailment arrangements currently in place – inefficient arrangements in my view* – drivers have incentives to act as sales-maximisers and will generally favour prices lower than a monopolist would seek to negotiate with regulators.  Overall there is some differentiation in the market and the structure looks to me more like regulated monopolistic competition than a regulated monopoly.  There are existing problems with no shows and with slow provision of services but it seems to me that these sorts of service issues are best addressed in a regulated setting.

The way forward in Australia is to either buyback the taxi licences currently issued and to accept a huge cost of doing so or live with the current system.  If licences are bought back, and the industry deregulated, then the precise nature of the deregulatory reforms needs to be thought through carefully.  Issues of service quality and pricing should remain regulatory concerns.

*In some jurisdictions drivers rent a taxi for a particular period and pay petrol costs. That at least reduces wasteful fuel-usage through cruising.   

 

 References

 B. Köszegi & M. Rabin, ‘A Model of Reference-Dependent Preferences, Quarterly Journal of Economics, 2006, 21, 4, 1133-1165.

C. Siebert, ‘Finding a Cab: a Better Deal for Taxi Customers’, Policy, Winter, 2006, 11-15.

K. Small & E. Verhoef, The Economics of Urban Transportation, Routledge, London & New York, 2007.

16 comments to The uneasy case for deregulating taxis

  • Hasn’t that Jason Soon done a paper for the industry or someone on this?

  • hc

    Jason’s paper is in Policy here. It is useful.

  • derrida derider

    An excellent post Harry. I’d always thought the case for limitless taxi licences was a no-brainer (a view coloured by my frustration with Canberra’s rotten taxi service), but you’ve made me pause a bit. As you make clear the case is still a reasonable one, but it’s no longer a no-brainer.

    Limitless licences, of course, are not the same thing as total deregulation. There are other market failures that would lead you to still want some regulation of this industry.

  • MikeM

    The real monopoly is that owned by Cabcharge, the charging system used by 96% of Australia’a cabs. It also owns Taxis Combined Services, a Sydney-based network that is Australia’s largest and ABC Taxis, another Sydney-based network. The real power associated with Cabcharge is its clout with state governments in regard to industry regulation.

    Macquarie Bank launched an effort in 2006 to take on Cabcharge with its Lime Taxis, using Mercedes Benz people-carriers that were intended to sharply increase the number of wheelchair-capable taxis in Sydney. Coupled with this was its own payment technology, intended to compete with Cabcharge.

    Lime managed to get an initial allocation of 50 wheelchair-accessible licenses (hoping to eventually have up to 250 Lime cabs on the road).

    Cabcharge struck back, obtaining 60 wheelchair-accessible licenses, fielding Toyota Tarago people movers and swamping the market. Also, Lime was apparently unsuccessful at getting approval to run its own booking and despatch system for disabled customers, and was forced to use the existing one operated by Cabcharge.

    Macquarie gave up in 2008, selling off Lime to the venture’s management. It kept ownership of the payment system at the time, but I don’t know whether it still owns it.

    So the net result has been that Sydney is better supplied with taxis for disabled passengers, but Cabcharge has shown that it can successfully repel even a well-funded and highly determined attack on its market position.

    The high priced and limited availability of taxi plates is the most obvious barrier to entry, but may not be the most significant one. I do not claim regulatory capture, but there is a question…

    Discussion of Lime at http://www.zdnet.com.au/insight/business/soa/Macquarie-sells-Lime-Taxis-leaves-IT-meter-running/0,139023749,339285083,00.htm and http://www.busaustralia.com/forum/viewtopic.php?f=3&t=29205&view=previous

  • hc

    I assume that the disabled taxis enable the government to avoid the fixed quota rules. I am interested in your observatiions on CabCharge and will dig around about this.

    I thought they just provided credit facilities in taxis.

  • fxh

    harry – was it you who wrote about a visit to NZ recently and the high price of taxis after deregulation? I can’t find it on a search of this site.

  • hc

    FXH, It is here. The post was casual observation but, according to the excellent book I cite by Small & Verhoef, it was accurate.

  • gyumi

    to hell with compensation, these taxi licenses holders shouldn’t get a damn cent, they have no legal right.

    Deregulate now!!!

  • Jim

    An upside of paying no compensation would be that no government in the future could credibly impose another licensing system.

  • hector

    Why must we buy back the licenses. These crooks run a monopoly ,and have been ripping us off for years. If anything, compensation should be paid from the theiving license holders to consumers!

  • hector

    Why must we ‘buy back’ the licenses. These crooks run a monopoly ,and have been ripping us off for years. If anything, compensation should be paid from the theiving license holders to consumers! Simply remove the monopoly and open licensing to all.

  • stan

    The current Taxi industry combines the worst aspects of stalinist collectives and deep south slavery. Children in an 18th century welsh coal mine had better working conditions and hours. It is the only employment you can spend a full day at work and be almost guaranteed at the end of it to still be in debt to your boss, to put food on the table for your kids you will have to spend hours doing over time at no penalty rates and every day is the same. I defy anyone to take out a baliee cab and to have a wage after even a 10 hour day, forget about the hundred years of forty hour weeks everyone else enjoys. You would owe hundreds if you worked a forty hour week. The fact is a driver can be on the road for as long as it takes to drive from brisbane to parramatta and then go and pick up your kids from sport or school and drive them through sydney traffic. it gets worse they can drive for 24 hours non stop on a semi as a baliee shift and and still drive your kids around. the industry is set up to exploit and shows the unions do nothing for the working man by allowing this outdated throwback of an industry to exist still

  • Jim Rose

    there is free entry in new zealand since the late 1980s. Taxis compete for reputation.

    Buying a franchise with the top NZ taxi co-op costs $80,000+ because their brand-name is so highly valued by passengers.

  • Martin

    I agree with other posts, why should those rotten mongrel licence owners should be compensated by a Government “Buy Back” scheme.
    The Taxi Licence is a modern form of “slavery” and many of the Taxi Drivers happen to be black too!
    I wonder how many hidden terrorists are driving Taxis ?
    How else can half of these immigrant Moslem drivers survive on $5 an hour & support a family? Don’t surprised that Al Queda is making up the income shortfall!

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