Let’s Deregulate Taxis

Commentary, Transportation, Peter Holle

It was a predictable reaction from the taxicab industry. A minor proposal for an airport shuttle bus to carry passengers back and forth from downtown – a common amenity in large cities – prompted cab owners to swarm city council to block any crack in their monopoly.

Why do the cabbies oppose change? Because they are boxed in by a regulatory trap, one that serves neither their interests nor those of the traveling public. It’s time we followed the example in other places and repealed taxicab regulations.

If you want to get into the taxicab industry in Winnipeg, you have to purchase the right to do so from an existing operator at a cost of roughly $200,000. One reason the price is so high is that the number of taxicab licences issued every year has been held to near 400 since 1947. Demand has risen while supply has remained stable, causing the dramatic increase in the value of a licence.

Our system also employs a bizarre regimen of price controls, one similar to the complex process that governs supply-managed food commodities like milk, eggs and chickens. Manitoba’s Taxicab Board holds hearings at which owner-operators present evidence about increases in their cost structures, items like gasoline, insurance and auto parts. Their requests for higher fares are almost always granted.

This sort of regulation was first embraced for passenger carriages in London, England in 1635 to mitigate traffic congestion. Those who support it almost always make the argument from quality – to make sure that drivers are checked out and vehicles properly maintained. But there’s no argument about one consequence – the system drives prices higher than they would otherwise be if they were set by competition in a free market.

As with supply management, the price argument is circular. Providers need higher prices to repay them for buying “quota,” which would have no value at all save for the restrictions on new entry. But the higher prices have consequences, especially in a relatively poor and cold city like Winnipeg.

Artificially high prices change behaviour. Fewer people buy the service and poor people are disproportionately penalized by the higher prices. In cold winter months, when the need is even greater, that means a significant loss of mobility for those who can’t afford their own cars.

It’s no comfort to them that long lines of taxis wait for high-end passengers from the airport. Even if they can scratch up the fares, those in poor neighbourhoods experience long delays for service. Many cabbies sit empty in those lines and refuse trips from certain areas. That’s all the more reason for us to deregulate.

A good model is available in the form of Indianapolis, a city roughly Winnipeg’s size. In 1994, it abandoned both barriers to entry and price controls. The number of cabs immediately increased, including “jitneys,” part-time taxis that operate during peak traffic periods. Prices went down. The quality and frequency of service, especially in poor areas, went up and complaints went down. The average waiting time for arranged service went from 45 minutes to 20 minutes.

That confirms the positive experience of American cities that deregulated taxicabs, a list that includes San Diego, Seattle, Phoenix, Kansas City, Milwaukee and Raleigh. On average, such reforms improved service levels by 30 percent. About 12 percent of cities now have unrestricted taxicab start-ups and almost a third has no regulation of fares. Whole countries like New Zealand, Sweden and Ireland have done the same, and parts of Japan and the Netherlands. Studies concluding that deregulation improved conditions overwhelmingly dominate the literature in economic journals.

Of course, there can be problems. When Sweden deregulated in 1990, its taxi population exploded. That growth proved too much for the market, fares declined too fast and many operators went bust. In the long run, however, profitability returned and Taxi Förbundet, the cab drivers’ association, agrees that the current, competitive situation is preferable to regulation.

Ireland deregulated in the same year, and its experience was more positive. Waiting times plummeted, the number of cabs tripled, fares declined and – more importantly – costs for new entrants fell by three-quarters. A decline in the cost of licensing formed a large part of that, and the transition to a free market in Winnipeg will have to address that problem.

Our options if we deregulated? We could follow common practice and simply let current owners eat the loss of the inflated value of their licence costs. The provincial government whose law caused the black market might also partially buy them out, which would cost millions of dollars. We could do what Australia did to transition its dairy industry to a free market – buy out part of the trapped value with the support of a temporary tax, and let remaining operators absorb part of the loss.

None of those are attractive choices, but in the long run the market would work its magic and make them more palatable to the public. They would then forever enjoy more affordable fares, more cabs, better service and – as a bonus – an airport shuttle service that threatens nobody.