Adam Smith Opposes Regulation Of Taxi Industry

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Peter Fricke Contributor
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Regulations on transportation services are intended to protect consumers, but for the most part succeed only in raising prices and reducing quality of service, according to a report by the Mercatus Center.

The report’s authors, economics professors Stewart Dompe and Adam C. Smith, contend that ridesharing services like Uber and Lyft are “revolutionizing taxicab and transportation services,” but have come under fire from “entrenched interest groups… [that] use government to protect their privileges and stifle market innovations”—a process known as rent-seeking.

“The goal of rent-seeking,” they explain, “is to create higher profits by lobbying politicians to impose costly regulatory burdens, such as licensure, safety prescrip­tions, and price controls, on their new competitors.” (RELATED: Anti-Uber Efforts Mostly Fizzling)

In the taxi industry, the main barrier to entry is medallions, which are required to operate a taxi legally within most cities and are generally available in finite numbers. In New York City, the number of medallions actually decreased by more than 4,000 between 1937 and 2004.

According to the authors, the main result of this artificial limitation “is to keep prices high and actively discour­age services to lower-income customers.” Ridesharing services, in contrast, “can reverse this trend by maintaining a high quality of service while extending coverage to underserved communities.”

Moreover, the “windfall” produced by medallions is concentrated among “cartel operators… who have seen tremendous growth in this asset’s value.”

“Over the last 80 years, taxi medallions have generated an annualized 15.5 percent rate of return,” whereas cab drivers continue to earn only about $30,000 per year. (RELATED: Uber, Lyft Defiant in Face of Los Angeles Ban)

Another regulation justified as a consumer protection is the establishment of uniform rates. Typically, the case is made with reference to tourists, who “are unlikely to be familiar with the specific rates of competing cab companies, and… have no idea whether their driver is tak­ing the optimal route.”

However, Dompe and Smith contend that, “uniform rates are no more in the consumer’s favor than having uniform health insurance premiums for smokers and nonsmokers would be,” because they do not account for risk.

They note that, “operating in high-crime areas puts drivers at an increased risk of robbery and violence,” causing them to “effectively lose money when servicing high-crime areas because they are not being compensated for bearing additional risk.” As a result, “they simply refuse to accept fares” in high-risk areas, knowing there are “more customers than capacity and [they can] pick and choose their fares.” (RELATED: Houston Sting Catches Uber Drivers Accepting Street Hails)

Ridesharing services disrupt this calculus, in the first place by allowing customers in under-served areas to pay rates that are sufficient to attract drivers, and ultimately by creating competition that “forces companies to expand service into new areas, and with little to no increase in rates.”

The final contention dealt with in the report is that taxi regulations are necessary for consumer safety, for instance by requiring drivers to carry insurance and undergo background checks.

Dompe and Smith argue that, “these concerns are largely addressed by the self-regulating properties of these markets” when ridesharing is an option, primarily because consumers are able to rate their drivers.

“If drivers aren’t courteous, drive unsafely, or do not maintain their vehicles, customers can leave nega­tive ratings and comment on driver performance,” they point out, “and if a driver’s rating drops below a certain threshold, they are no longer able to operate.”

More to the point, ridesharing companies “want to hire safe drivers because safe drivers will increase profitability” both by lowering the cost of insurance and by improving the reputation of the company. (RELATED: Trash Old Rules That Preserve Outdated Business Models)

Such incentives accrue to the benefit of drivers, too. According to the authors, “Uber drivers make an estimated $90,000 (or three times their cartelized coun­terparts) per year in New York City.”

“Without the ability for entrepreneurs to legally enter the market,” Smith and Dompe warn, “existing providers have little incentive to increase the quality of their service or cater to less lucrative communities.”

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