The havoc wreaked by outdated taxi regulation

Last Friday, a colleague and I attended a conference on the plans for a Capital Markets Union in Brussels. I decided to order an Uber to take us to the airport afterwards, because it cost only about half of what regulated taxis charge. A taxi driver spotted us as we were entering the vehicle. He immediately jumped out of his car and approached us, knocking fiercely on the driver’s window. He went on to shout at and harass the driver, threatening to call the police and block our way until they arrived. It was only when the taxi driver’s passenger showed up that he finally relented and went back to his own vehicle, allowing us to get on our way. Saved by the profit motive, once again.

This was not an isolated incident. Media reports show repeated instances of similar reactions from drivers of licensed cabbies. Uber drivers also face a risk of having their cars seized for daring to sign up to the service.

In a sense, these events are spillovers of the political disputes taking place at Brussels’ city hall and its Ministry of Transport. Licensed cabbies are feeling the competitive pressure, and in turn, they are pushing local authorities to protect their monopoly. Uber’s Brussels service, launched in February 2014, has been in legal limbo for much of its existence. And even though the city administration is expected to come up with a stable framework to bring Uber fully into the formal economy by January 2016, we know little about the conditions – fares, driver and vehicle requirements, waiting times (as in France) etc. – that they will impose on the California-based company.

The episode neatly illustrates the very damaging long-term consequences, both economic and social, that state intervention can give rise to. Indeed, as bad and counterproductive as many government regulations are, few appear as transparently harmful and wrong as the taxi monopoly and the often concomitant ban on alternative services.

What is more, they are outdated. Before the advent of mobile apps, there may have been a case for licensing and regulating prices and vehicle conditions (Matt Feeney at the Cato Institute explains this here). It could be argued that there were substantial informational asymmetries and transaction costs from unregulated prices. Potential passengers faced uncertainty about the qualifications and professionalism of drivers. Furthermore, they would have been more likely to hop into the first available cab than to bargain and wait for an attractive offer. According to this thinking, government regulation was needed to narrow the information gap by specifying requirements of taxi drivers and their vehicles, as well as the prices they were able to charge per mile and minute (although entry restrictions were still unjustified). Even then, market mechanisms could have coped with the information issue – for instance by encouraging cabbies to form associations or clubs which would set private standards and prices, and enforce them among members. They would rely on reputation for their business, giving them an incentive to demand good service from members, and to punish and expel those who failed to comply. The existence of competing clubs (and indeed companies) along these lines in the absence of government restrictions to entry would, in turn, put downward pressure on prices.

But regardless of what one makes of the above, the fact is that mobile apps have solved the riddle. With Uber, users can find out in advance the name of the driver who will be picking them up, as well as the make and licence plate of their car, and their average star rating from previous users. Those drivers who consistently obtain suboptimal ratings face a warning and, eventually, the end of their contract. Fares are transparent, and surge prices ensure that if demand rises, more cars will hit the road to meet it. Uber and similar apps like Lyft and Addison Lee – which offers fixed prices based on distance – have transformed the market for private transport services, bridging the information gap and offering prices that no regulated competitor can match. The benefit to passengers is clear: greater choice (if one still prefers drivers with The Knowledge, one is free to use them); increased supply of private car hires; and more competitive prices, which have both expanded the market for transport services and introduced some degree of pressure on regulated fares.

Yet, the benefit to drivers shouldn’t be overlooked, either. By its nature, Uber offers contractors a flexible source of extra income – of course, some drivers may be dedicated to passenger transport full-time, but they need not be. This is especially true in the case of Brussels where, because of the app falling into a legal grey area, only UberPOP, the most basic type of Uber ride, is available. This is aimed at individuals with a vehicle who want to work a few hours a week to complement another source of income. (One still obtains the same information about drivers as with other Uber services.) The app is therefore attractive to low-income individuals, often self-employed and immigrants, who like the choice of working hours and the income security offered by market-driven fares and GPS technology to locate rides.

Banning Uber to protect licensed taxi drivers thus has a negative impact on people who are un- or underemployed, recent arrivals with little work experience and basic language skills, and more generally those to whom Uber’s relatively low fares still make a real difference. But these people lack the rent-seeking skills and political clout of the taxi cartel, which has a strong incentive to block any attempt at reform.

When it comes to ending harmful restrictions on the transport market, the most salient stumbling block would appear to be the high price paid by taxi drivers for their licences, which in some European cities reached the hundreds of thousands of euros. Many cabbies took loans in the hope that they might be able to pay them back with their taxi income and by re-selling the licence at retirement. But with entry restrictions removed and fares deregulated, drivers stand little chance of recouping the cost.

Governments – and this decision should be made at the local level – could try to make the change more politically palatable to cabbies by compensating them to some extent for the license costs they incurred. This can be done on a means-tested basis, and/or on a sliding scale. This is not necessarily good economics. Taxpayers, some of whom may never use a taxi, would end up paying for this. Nor would it be legally necessary. When Ireland liberalised entry into the taxi market, thus wiping out the value of the licenses, the courts decided that taxi drivers were not entitled to a compensation, as they did not have a ‘property right’ in the value of their licenses.

But a partial compensation would be justifiable on other grounds. Current license holders, after all, did not have the option of entering the market without purchasing a license. While they chose to do so on their own volition, it was a choice distorted by previous government interventions. On a more practical note, partial compensation would also smooth the transition to a deregulated system for taxi drivers, making them more amenable to change. In any case, it would be a one-off expense to a pay off the legacy costs resulting from misguided past interventions. An intervention to end intervention, and hopefully for good.

Diego Zuluaga is the IEA’s International Outreach Officer. Follow him on Twitter: @DiegoZuluagaL

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.