Wednesday, March 31, 2010

The cost of cameras

The real cost of the soon-to-be-mandatory taxicab cameras won't be the 30-odd cents it adds to the cost of the typical cab ride.  Rather, it's the loss of surplus that will come when the World Cup hits in 2011 and jitney cabs will fail to come into the market because of the increased fixed cost of shifting your private car into taxi service.  Right now, best I'm aware, so long as you have a driver's license that permits it, nothing much stops you from slapping a sign onto your car saying "Cab" and charging to run folks around town.  We'd expect that to happen during odd spikes in demand.

We're going to have such a spike when the World Cup hits.  It's unlikely many new permanent cabs will come on-stream with the demand shock, and the temporary folks will be knocked out of the market with the camera regulations.  With lower supply elasticity, current cabs will earn rents either through fare increases, much higher turnover and shorter downtime, or increased ability to be choosy about customers.  Absent the regulation, I'd expect jitneys at airports if airport regulations allowed it and near the venue after the event.

I'd previously noted the raising rivals' costs argument here; TVHE here grasps for an alternate efficiency explanation but can't really find one.  Neither can I.  At least not a plausible one.

As the incidence of the regulation will largely fall on foreign visitors and rugby fans, I'm not too worked up about it.  So long as I don't need a cab for any reason during a demand spike.  The cameras are fairly cheap and won't do much to the baseline stock of taxicabs: that'll still move with longer term demand.  We'll just see reduced supply elasticity during odd peaks.  Fortunately my cabbing needs tend to be a- or countercyclical with respect to these events.

4 comments:

  1. Hi Eric,

    How long is the world cup for? We talking excessive greed-motived rent seeking behaviour for 2 weeks aren't we?

    :)

    On a similar bootleggers and baptist argument, I've just been reading Southern Cross Societies Annual report (http://www.southerncross.co.nz/Portals/0/Group/Annual%20Report%202009.pdf) noting on page 6 Southern Cross fully endorses Pharmac's cost-benefit approach to drug funding, while similarly fully endorsing the Minister of Health's telling District Health Boards that cancer care must be one of their main priorities.

    I'm sure the very expensive, and now publicly funded, herceptin treatment (not endorsed by pharmac) had nothing to do with Southern Cross fully supporting a publicly funded Cancer service...

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  2. The RWC will be the big demand spike, but it'll of course also hit any other event causing such a spike where we otherwise might expect some jitney entry.

    On Pharmac and SC: so long as the health insurance market is somewhat competitive, will it much matter? Premia will rise or fall with the expected cost of treatment, so more costs offloaded on the public system should result in premium reductions. Couldn't reasonable argument also be made that, so long as they can screen for pre-existing conditions and set premia according to family history, the risk-averse wealthy are more likely to purchase more expensive private insurance the less is covered publicly?

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  3. I totally agree with the logic Eric, I just don't think the private insurance market is that competitive. In that environment, its in the interests of firms with price setting ability to advocate for extention of government services into high cost/new technology health care.

    Its all about cost minimisation. If the insurance market is kinda competitive then the more of the herceptin-like treatments (ie. the expensive, unproven benefit ones) you can get the govt to pay the more the consumer premiums should be eroded down over time through competitive pressures. But if the market isn't competitive, if there is price-setting power by firms, then the more costs you can shift into the govt sector, then the more wedge your company can 'safely' make, because its not going to get eroded.

    That's why I love economics :D

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  4. If the cost savings dominate the loss of the marginal customer (who flips back to public system or fails to join the private system with the reduced gap between the two), then I buy it. If demand for private health insurance is relatively inelastic, then that could reasonably be the case. Even if there's not a lot of competition among private health providers, there's competition between the two systems.

    If SC pushed for it, they must have thought it was in their interests, so I suppose that tells us something too about the state of the world.

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