Losers and winners, or what’s at stake in ‘taxis vs. Uber’

It is more comfortable, intellectually, to draw a parallel between the “taxis-Uber war” and historical episodes of “creative destruction”, where the impact of economic progress brought by new technologies is uneven, creating losers and winners. Even if society as a whole becomes more prosper – and even more equal –, losers will naturally resist change.

Coverage and debate on this issue have framed it in this way, when this is not what’s truly at stake. My view is that it should, instead, be taken as a classic distributional conflict.

Platforms such as UberX (ride-sharing mechanisms such as UberPOP are a different matter) have not introduced paradigm shifts in taxicab markets. Instead, simply, by subverting the existing system, they have shed light on a historically unjust situation: the administrative limitation to the number of taxis circulating in a given city, creating a monopoly rent for the owner of one or more such licenses.

The solution for this conflict is thus easy to understand, but hard for politicians to admit: the end to limiting taxi licenses in cities and metro areas.

Note that it is either cynical or at least partially incorrect to claim it is not (locally) unfair for the rules and regulations to be different between regular taxis and cars operating using Uber-type platforms. They both produce a service which is essentially the same. In simple terms, some people will defend these platforms, arguing that such differences are fair because Uber rides are different, fresh and modern. But, in reality, the transport services they provide are essentially the same; calling a Uber is now almost as simple as hailing a taxi on the street and just as easy as calling one through the phone. Also, some public service tasks performed by taxis could just as easily be provided by these platforms.

While these arguments may be faulty, it is much worse to defend the opposite: that the taxi industry must be “protected” from “unfair competition”. This amounts to the same as defending a rent-seeking pressure group.

Taxi regulation takes three different forms: safety (quality), fares (price) and entry (quality).

In the first case, it is consensual that some regulation is necessary to ensure minimum safety levels – this might even not be directly provided by government, but in liaison with the platform providers.

Some kind of basic qualification must be required, to ensure drivers are capable of transporting passengers safely, an adequate insurance policy must be mandatory; and other basic safety requirements with respect to the actual vehicle. Yet, digital platforms allow for much more intense information diffusion in the market, creating stronger competition, at the quality levels. Uber does this naturally through different safety checks and user feedback, for example.

The case for fare regulation is less robust, but it does exist. Typically, in practice and in the literature, there was a distinction between street hail markets – taxis which are circulating in the street and a passenger can call one of them at any time, at any place, basically selecting his provider at random – and phone book markets.

The first case entailed significant asymmetrical information problems, since the customer, at a given moment, is only aware of the fares asked by the particular taxi that was passing by when he needed one; this would entirely justify price regulation. In the second case, it would be easy for a potential customer to call different taxi providers if he disliked the price, so this problem would be much smaller (though still existing, under rational ignorance).

Now, in the current situation, taxi fares obviously need to be regulated, since they work in a monopoly. The true problem lies in the fact that such monopoly is completely unnecessary, and is artificially created by entry regulation. In most cities in advanced economies there are licenses individually associated with each vehicle, normally issued by local authorities.

The number of these licenses is fixed. Typically, it is sparsely increased with new issues, but existing ones can be freely exchanged (and usually, if if they cannot be legally sold on, a black market emerges). So, the number of taxis circulating in a given city is controlled. New entrants can only become so easily by acquiring an existing license, usually at very substantial sale prices. A report by Portuguese newsmagazine Visão, in March 2016, vividly described this parallel market in the case of Lisbon, where new licenses were lastly issued in 2010, and the acquisition cost of an existing license can exceed €100,000.

Under any circumstances, limiting the number of taxis implies an artificial, unjustified restriction to supply in the taxi market. This is the core of the Uber/taxis feud, at least of its understanding by societies. Even the aforementioned report describes uncritically how the new license issues were strongly contested because they “overloaded the market”.

In this case, common sense seems to be opposite to solid reasoning. Despite what seems to be a frequent opinion, there is absolutely no reasonable argument in favor of a limitation to the number of taxis circulating in any city, let alone for policy decisions that enforce it.

None of the arguments usually put forward are well grounded. Some include: possible negative externalities such as traffic congestion or air pollution (already, at least partially, and more efficiently, controlled by other policies such as general vehicle taxes); public services provided by taxis (which may require some kind of subsidy, but only in rural, sparsely populated areas, rather than urban contexts); information problems (which do not exist today, e.g. with widespread mobile phones); economies of scale; “excessive competition”; et cetera.

We shall seek to examine these arguments in future work. But the strongest of arguments misleading policymakers and the public opinion on taxis – beyond political economy issues, related to active rent-seeking activities by the taxi industry – is also the hardest to dispute: “it’s how it’s always been done”.

But the fact that the market price of these licenses is often very high proves precisely how the entry limitation is artificial, unnecessary and unfair. It shows that taxi license owners effectively receive a rent for it. It’s easy to understand how these values will roughly correspond to the expected value of this rent, i.e. the difference between profits generated from operating the taxi and the “normal” profit rate in the economy.

These rents are materialized by the excessively high prices allowed by this monopoly situation. They imply that, on the one hand, taxis are less used by consumers than they would be otherwise and, on the other hand, that consumers are paying more than they should, drawing less net value from the trip. The protection granted by such regulation also contributes to suboptimal service quality levels.

All in all, there’s a net social welfare loss, particularly troubling if we consider that for certain groups, such as the elderly, taxi services play an important part in their lives, e.g. for access to medical treatments and appointments. It can hardly be considered a “luxury” service.

Dismantling such regulation schemes would lead to an immediate reduction to the wealth of license owners. While this would be completely fair overall, it could create locally unfair situations, which would likely be social and politically unacceptable. Take, for instance, the classic example is of a retiree who invests his life savings in purchasing a taxi license, to have an occupation during his retirement.

This would require, then, a solution such as the one found in the Dublin taxi market liberalization, in 2000. A fund was created to compensate, at least partially, pre-existing license owners. Bad arguments are, however, stronger than they seem: in Dublin, after the 2008-9 recession, politicians fell into the temptation of bringing back entry regulation. Data seems to show that the outcome, for consumers and the economy, was predictably poor.

So, considering the strength shown by the taxi industry in several countries, with their often violent demonstrations, it is hard to be optimistic. The Portuguese government has plans to legalize and provide adequate regulation for Uber and other markets; to fully follow through with such intentions, it must also have the courage to put an end to this historical injustice. Portugal would become an example for other countries; of course, for that to happen, the government would have to be brave enough to recognize that, by defending the taxi industry like several members of Parliament have taken to do, they are actually defending the same “monopoly rents” of which they are otherwise so critical.

This article translates a column originally posted in the Portuguese online newspaper Observador.

 (the opinion expressed herein is binding only on the author)

Luís Teles Morais

Research Fellow