Taxi users ripped off again

As I noted in May, it is nearly 30 years since the CIS started publishing critiques of taxi regulation, with the most recent publications being Jason Soon’s 1999 paper and Krystian* Seibert’s 2006 Policy article.

The basic problem is that taxi licences are limited in number, and are sold for huge sums. Jason’s article reported that a Victorian taxi licence cost $265,000 in 1998. 10 years on an Essential Services Commission report put the licence cost at nearly $480,000. The cost of servicing this capital adds massively to the cost of running a taxi, and adds significantly to the fares paid by taxi users. Taxpayers suffer too in having to subsidise taxi use by some disadvantaged groups.

The ESC report points out other problems in the industry as well, such as the depots to which taxis must be affiliated and pay fees which are ‘likely to include an element of “monopoly rent”. ‘

In its latest round of fiddling at the edges of the issue, the Victorian government has announced some extra licences and a fare increase of 6.1%, taking the total fare increases to more than 10% for the year. It also offers what I think is irresponsible investment advice:

Why are the licences being issued by public tender?
To provide an opportunity for small investors, mums and dads, to purchase a taxi licence and address the scarcity issue that has seen licence prices escalate in recent years. (italics added)

The value of these licences is entirely dependent on regulation that fails any conceivable public interest test, and therefore could (and should) be abolished by a future Victorian government, or diminished in value by the issuing of additional licences. As taxis are a price controlled industry, there is the added regulatory risk of prices being kept too low to make a good return on the investment. Essentially this investment advice is a promise that the industry will continue to be regulated in the interests of licence holders, a promise no government should make.

If more licences are to be issued, they should be for a set time period so that a future government can phase out the current licensing system without being exposed to large compensation claims.

* Krystian has reverted to the original Polish spelling of his name.

6 thoughts on “Taxi users ripped off again

  1. I think it’s a highly innappropriate thing for government to be saying, no government should effectively be tying their hands like that. Taxi licences need to be thought of as a regulatory instrument (albeit a poorly thought through one), and not an investment or property right. I think there may be similar issues that arise in the case of emissions trading permits – What if too few permits are released for some reason and so governments down the track decide to release more and this pushes down the value of existing permits – Will existing owners of permits demand compensation? I’m not an expert on climate change science – Perhaps too many permits will be issued, but I definetly think that the proprietary nature of emissions trading permits (or lack of proprietary nature) needs to be clarified now rather than later.

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  2. Yep, the obvious thing is not to sell a one-off batch of licences but to commit to selling a fixed batch of new, permanent licences every year for the indefinite future, with such commitment being enshrined in black letter law (it’s much harder too lobby for repeal of a law than to change a regulation). This will address complaints about uncertainty while gradually whittling the value of licence fees down to zero.

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  3. Another way to do it, as I wrote in the Policy article, would be “to remove restrictions on taxi numbers completely, but initially to allow only current taxi licence owners to operate additional taxis. Under this system, new taxi operators would not provide competition for existing taxi licence owners but competition between existing taxi licence owners would increase. It would provide lower fares for consumers while
    ensuring that any profits from taxi operations continue to flow to existing taxi licence owners as a substitute for compensation”.

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  4. I’m not sure whether the number of Black Cabs in London is subject to a ceiling, but it is effectively limited by the rigorous training that Black Cab drivers have to go through – a three year process of studying and memorising the streets of London: one ways, no rights turns, etc, everything. It culminates in a lengthy exam where they are quizzed on the best route to get from A to B, from Y to Z, etc. They call it the Knowledge. As a result Black Cab drivers make a good living, each driver owns his own cab, decides his own hours, etc. Its almost like a profession – people say you can trust your life with a Black Cab driver. But from consumer’s perspective the best outcome is that they ALWAYS knows where the street is that you want to get to and how to get there.

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  5. In London there is no ceiling but the training requirements have the effect of imposing a de facto ceiling. That said, there are 21,000 Black Cabs in London which off the top of my head means there are more cabs per person in London than Melbourne. There is still fare regulation, so a lack of competition on that basis. However in London you also have the option of using a mini-cab which you can’t hail on the street but can call up and order. They are licensed by the Public Carriage Office in terms of having to adhere to certain standards but there is no ceiling on numbers of mini-cabs, they are also generally cheaper than Black Cabs.

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