Taking The Public For A Ride

Commentary, Transportation, Peter Holle

This week taxicab fares will jump 14%. Winnipeggers now get to pay among the highest rates in Canada. The increase was determined by a murky government agency called the Manitoba Taxi Board, which regulates that industry.

If there’s one thing that students of the modern market economy have learned over the past two decades, it’s that regulatory agencies become dominated by the industries they’re supposed to oversee. In economic jargon, these industries experience something called “producer capture.” Inevitably the interests of the, a small, well-organized minority industry (the service providers), supersede those of the general community (the service consumers). The public ends up with less service and higher prices compared to outcomes produced in a more open, less controlled market.

This is confirmed by the increase in consumer welfare whenever the government steps back from regulating an industry. For example, when the laws micro-managing the airline industry tumbled, prices fell, the choice of carriers expanded and service increased. Telecommunications deregulation led to rapidly falling prices for communication services. Deregulation in the electricity industry will mean lower costs for power.

The taxi industry is a textbook case of regulatory capture. In fact, several studies link restrictions on entering the industry and price-rigging to lower service and higher prices. One analyst linked regulation of the New York taxi cab industry to higher death rates. A shortage of cabs, arranged by the taxi companies operating in cahoots with the taxi commission, meant that people had to wait longer for cabs on streets. There, they risked mugging and more.

As always, the regulatory burden hurts those least able to pay for it. In New York’s case, why bother offering service in the less flashy parts of town when big tips await in Manhattan? Also, fewer cabs, or less supply, automatically means customers have to pay higher fares. Finally, the studies show that restrictions that prevent entry into the cab business limit economic opportunities for low-skilled workers seeking to start a relatively simple business. They can’t create jobs that otherwise would exist in a normal commercial environment.

What does this have to with the Manitoba Taxi Board?

A lot.

Do we regulate the price, variety and supply of computers? The cost of a haircut? Do we employ well-paid civil servants to determine fair prices for a can of asparagus or the price of gasoline? Do we have officials examining the operating costs of shoe stores to calculate the price of runners?

We don’t because there’s no need to.

Such activities were undertaken with great vigor in wartime economies. Should these activities have a place in Manitoba’s ostensibly modern economy? Objectively, there is a strong case for review because they consume public resources and have the effect of reducing community welfare by keeping prices high. From a social equity viewpoint, price and entry regulation are very unprogressive – they hurt the least affluent segment of Winnipeg-those who can’t afford a car.

Various cities and countries have shifted the focus of public policy in the cab business away from protecting a handful of operators towards maximizing benefits for consumers. They have ended price and entry regulation in their taxi sectors. As economic theory predicts, fares fell while service increased.

Indianapolis, a booming mid-western city, exposed civic services to competition to reduce its taxes and created an unprecedented economic boom. In 1994, the council deregulated the city’s taxi industry. It removed entry controls, replaced set fares with a maximum rate and allowed companies to operate part-time.

Within six months, 32 new companies had started up. Average mileage rates were 7% lower. By July, 1996, 156 additional taxis were serving city consumers. In contrast, the number of taxis in Winnipeg has been frozen at 400 since 1947.

The Taxi Board, like the woolly mammoth, belongs to the Ice Age. Indianapolis shows we have nothing to fear from a thaw.