By Matthew Mitchell & Michael Farren of Mercatus. Excerpts:
"The taxi industry has long been a textbook example
of regulatory failure. Using Washington, D.C. as a case study, we show
that a thicket of local rules limit entry and dictate operations at the
driver, vehicle, and company level. These regulatory procedures—we count
33 in all—exceed the number of steps it takes to start a small business
in Venezuela (14), Mozambique (19), or Bolivia (20), countries
notorious for their steep regulatory burdens. They also come with a
large price tag: a driver can spend up to $2,643 in fees and mandated
equipment to get her car ready to be a taxicab. And because many of
these fees are imposed at the company level, drivers who rent from major
companies may not even know that the costs are being passed on to them
in the form of higher rental prices.
Once
in operation, regulations also dictate how drivers may conduct their
businesses. These rules govern everything from the price a driver must
charge and where she may pick up passengers, to how she must handle
records and even the colors she must paint her car. These rules have
long been portrayed by their defenders as necessary consumer protection
measures that lessen the “asymmetric information” problem endemic to an
industry in which riders have little choice but to accept the first taxicab that stops to pick them up.
The reality, however, is that these rules have manifestly worsened the customer experience:
- Price controls have forced prices above what would prevail in a competitive market.
- Steep entrance fees and burdensome barriers to entry have undermined competition.
- Mandated alterations to vehicles have created barriers to exit, thus deterring entry in the first place.
- And mandated business practices have “locked in” antiquated technologies and old business models.
Economic
theory and decades of research suggest that these regulatory limits on
competition have harmed consumers and would-be competitors more than
they have helped incumbent producers. Moreover, they’ve made firms
inattentive to consumer desires and costs while encouraging them to
expend scarce resources pursuing regulatory privilege. These efforts to
secure special favors are an enormously destructive phenomenon that economists call “rent-seeking.”
But there is hope.
Ironically,
by dictating the most minute details of the industry’s operation,
policy makers have created a significant profit opportunity for firms
that can serve the same customer needs in an entirely different fashion.
By employing new technologies and different business models,
ridesharing firms such as Uber and Lyft have managed to be classified
differently than taxis in many U.S. jurisdictions, thus avoiding many of
the most obnoxious taxi regulations. (This has happened before.
Professor Diana Thomas has written
about stifling medieval beer regulations that created an opportunity
for firms to operate outside of the regulatory regime once technological
change made those old rules obsolete.)
Like
the intra-state (and therefore non-regulated) airline routes of the
1970s, these comparatively lightly-regulated firms offer an instructive
comparison to highly-regulated taxis.
Comparing
several popular routes in the D.C. area, we find that street-hailed
taxi trips are up to 3 times more expensive than ridesharing trips.
Moreover, customer feedback mechanisms provide instantaneous, detailed
information about the driver, the ride, and the vehicle. These
constantly evolving feedback mechanisms permit ridesharing firms to
balance the information asymmetry better than a half-century of
regulations have ever been able to. The result is a cheaper, more
reliable, and higher quality vehicle-for-hire experience. This explains
why ridesharing firms have rapidly gained market share. As we report:
"As
late as the first quarter of 2014, only 8 percent of business travelers
who filed vehicle expense reports through the expense-reporting firm
Certify used ridesharing firms, while 37 percent used taxis and the rest
rented cars. By the first quarter of 2016, however, fully 46 percent of
business travelers used ridesharing firms, while just 14 percent used
taxis."
Ridesharing firms
also seem to be drawing in new customers. A Portland study found that
the city’s entire for-hire market was more than 60 percent larger just 4 months after ridesharing firms entered.
So
regulations that were, as Stigler put it, “acquired by the industry,”
and “designed and operated primarily for its benefit,” now stand in the
way of the industry’s survival. This presents policy makers with a
choice: level the regulatory playing field by deregulating taxis down to
the same low-burden level of ridesharing firms or watch the taxi
industry die an undignified death at the hands of regulations it once
benefitted from."
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