“Market failure” and taxis

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Erik Ibarra had a novel idea—he would use small electric cars in downtown Houston to ferry passengers. And he wouldn’t charge for his service. His revenue would come from tips.

The city of Houston also had an idea, but it wasn’t so novel—Ibarra’s service was declared illegal and ticketed Ibarra’s company at least fifteen times in 2009. What was Ibarra’s crime? Was he scamming passengers and refusing to deliver them to their desired location unless they paid an outrageous fee? Was he driving recklessly? No. Erik Ibarra didn’t have the city’s permission—he didn’t have a taxi permit.

Tina Paez, the city’s deputy director of administration and regulatory affairs, said Ibarra’s vehicles have been cited as taxis because they take passengers.

“If they charge a fare or accept a gratuity, they are a vehicle for hire,” she said. “Even though they don’t technically charge, they come under the ordinance.”

Who was harmed by Ibarra’s “transgression”? It certainly wasn’t his passengers, as they didn’t have to pay anything for their ride unless they chose to voluntarily do so. It wasn’t the millions of Houstonians who knew nothing about his service. The “victims” were those who play the city’s taxi permit game—the taxi companies.

Virtually every city in America regulates taxi companies. While these regulations vary in their scope and details, they usually restrict the number of taxis that can legally operate and regulate the fares that can be controlled. Why? What justifications are offered from prohibiting an individual from offering a service?

While a multitude of arguments are made in defense of such regulations, those arguments generally fall into two categories: public safety and “market failure.” Let us look at these individually.

The public safety argument holds that regulations are necessary to ensure that taxi companies operate safe vehicles and have the proper insurance. This might seem plausible. Who wants to ride in a broken down automobile? But why does government need to intervene and restrict the number of taxis in order to ensure safety? Limiting the number of taxis and regulating fares does not ensure safety, just as government control of schools does not ensure an educated student.

The fact is, the free market does more to promote safety than government ever could. If a taxi company insists on operating dilapidated vehicles and endangering the safety of its customers, it will not remain in business for long. Every rational businessman knows that harming customers is not a good business plan. And irrational businessmen do not remain businessmen.

What of the “market failure” argument? Is it true that taxi services are somehow immune to market forces? Specifically, what is unique about taxi service that leads to the claims of “market failure”?

In 1984 the Federal Trade Commission issued a report on taxicab regulations. The report identified ten alleged “market failures.” Broadly stated, many of these “failures” result from “imperfect” information—taxi customers cannot judge the quality of service or the fares that they will be charged. A second broad category is pricing—in some situations passengers may have few choices and might be charged outrageous rates. But are these “market failures”? Or are they something else?

To demand that consumers have “perfect” information is to set an impossible standard. Humans are not omniscient, and they never will be. Often, we must make decisions with less than complete knowledge. So? If I need gasoline, I am not going to spend two hours shopping for the best price so that I can save $2 on a tank of gas. In contrast, if I am going to make a major purchase, such as a home, I will spend considerable time conducting research. The context—the importance of the transaction—will determine how much information I need and how much time I should invest to acquire that information.

Certainly, nobody wants to pay more than is necessary, whether they are buying gasoline, a house, or a taxi ride. But to use the coercive power of government to regulate prices forces everyone to pay a very high price—restrictions on their freedom.

Claims of “market failure” are founded on an arbitrary assertion of how the market should operate. And when the market fails to meet this arbitrary standard, it has “failed.” This is no different than running massive computer models of the NFL season and declaring that, if the Cleveland Browns do not win the Super Bowl, we have an “NFL failure.” Individuals have free will, and we often make decisions that the so-called experts don’t believe we should. The experts said that Henry Ford should not pay his workers twice the industry average. The experts were wrong. His turnover plummeted, his efficiency rose, and his profits soared. And, he cut his prices by nearly sixty percent.

Because Ford was free to act on his own judgment, he could prove the practicality of his ideas. He was free to demonstrate the truth that he saw before others saw it. What would have happened to America’s automobile industry if Henry Ford had been prohibited from acting as he thought best? And how much better might the taxi industry be if entrepreneurs and businessmen could act on their judgment, rather than follow the dictates of politicians and bureaucrats? To answer this, we can look at those cities that have deregulated taxi service.

Denver, Colorado, deregulated taxis in 1995 and within four years, a startup taxi company employed more than one hundred drivers. In Cincinnati, Ohio, deregulation led to an additional 237 cabs on the streets. And in Indianapolis, Indiana, 158 new cabs entered the market. These new taxis offer economic opportunity (often to those with few job skills), they bring service to areas other companies often neglect, and they usually reduce rates to passengers due to competition. With all of these practical benefits, who could possibly be opposed to freedom in the taxi industry? The answer is: The taxi industry.

Taxi regulations make it almost impossible to start a taxi company. Those who have secured the necessary permits operate a regulated monopoly. They are protected from competition. They are not guided by the demands of the market, but by the demands of government officials. It’s a cozy gig if you can get it, but often, the price of admission is outrageous.

For example, in New York City, the price of a taxi permit (called a medallion) was $766,000 in 2009! In other words, to get the city’s permission to drive a taxi, an individual had to fork over more than three-quarters of a million dollars. Aside from these arbitrary costs imposed by government, what does it really cost to start a taxi service? If you have a dependable vehicle, insurance, and a reasonable knowledge of the area you will service, the cost is nothing. Who benefits from this? Who can afford the outrageous cost to start a taxi service in New York City? Obviously, it is not some aspiring, yet poor, entrepreneur.

Interestingly, there is at least one company that simply invests in taxi medallions and then leases the medallions to taxi drivers. Apparently, it is more lucrative to secure government permission than to actually drive a taxi.

We regularly hear politicians of all stripes talk about the need to create jobs. And those same politicians often go to great lengths to enact or support policies that kill jobs or make their creation impossible. The fact is, no politician can create jobs; they can only destroy jobs. Any politician who is serious about creating jobs would advocate for the repeal of every law, edict, and regulation that interferes with the moral right of consenting adults to engage in the voluntary economic transactions of their choosing. And that includes taxi regulations.

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