Wednesday 1 September 2010

Canada's regulated markets

When I get to rent seeking and the transitional gains trap in my public choice class, I usually wheel out the New York City taxi medallion system as example.

Apparently, Montreal has the same problem. Writes William Watson in the National Post:
In 1952 there were just under 5,000 taxis in service on the island of Montreal. Hazard a guess as to how many there are now? 4,445. More than 500 fewer. Despite the fact that there are 500,000 more Montrealers than there were then and they’re a lot richer and better able to afford taxi service.

Why the drop in supply? Because in Quebec, as in most other Canadian jurisdictions, we have supply management in the taxi industry. And it operates just like supply management in the dairy and poultry industries. They say it’s a free country but if you don’t have a permit to enter the industry, you’re not allowed in. Always wanted to run a taxi business? Got a better idea for how to make it work? Tough luck. Take your entrepreneurial instincts to some other industry where entry isn’t restricted. But not, of course, milk or chickens.

The numbers quoted above are from a new paper on taxi regulation from the Montreal Economic Institute. It details the effects of the artificial restriction of supply. The most obvious is that permits to operate a taxi have acquired significant scarcity value. In Montreal, they now cost more than $200,000. In neighbouring Laval, almost $250,000.
Watson goes on to explore the various insanities in Canadian supply management.

There is a way out of transitional gains traps, but it isn't easy.

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