This is what happens when you don't read Demsetz

Way too many policy arguments take the following form.

1. Markets in an ideal world are efficient.
2. Here is a potential deviation of the real world from blackboard conditions, so we're in a second-best.
3. Policy can ameliorate outcomes when there is a market failure. So, here's what we must do.

What's missing? Any evaluation of whether the policy cure is actually an improvement on the status quo. Some policies are like using tweezers to pull out an irritating splinter - great idea. Others would have you hack off the arm to avoid the splinter. 

Harold Demsetz very nicely made this point way back in 1969. He was there critiquing Arrow on information market failures, but the lesson is more general. It isn't enough to simply point out a potential market failure. Markets fail but policies don't automatically induce nirvanas. We need comparative institutional analysis to tell us which world sucks less: the world with a market failure that isn't addressed by policy, and the world in which a real-world policy involving actual tradeoffs comes in to try to solve it.

Today's lesson in "this is what happens when you don't read Demsetz" comes from Dean Baker over at Cato Unbound.

Baker's argument:

• In a first-best world, we would have proper congestion charging and the like;
• We don't have proper congestion charging;
• Taxicabs can increase congestion;
• Uber likely increases the number of cabs;
• Therefore we need a complicated regulatory structure for Uber imposing fees by time of day and location of service.

Baker also reckons that while Uber's drivers are contractors, not employees, and despite that those drivers like the flexibility, the drivers should be treated like employees for minimum wage and overtime purposes.

Some folks just hate the idea of voluntary transactions among consenting adults that don't route through the State somehow along the way. 

A couple things to note:

• It's eminently unclear that Uber increases congestion. In the longer term, it will reduce the amount of street space that need be devoted to parking, freeing up more road for driving. It will also reduce peoples' need to take a car for the day because of that one trip they need to make mid-day and instead let them commute in using the bus, then take an Uber for the part when they do need a car. 
• Using charges on Uber to solve congestion instead of broad-based congestion charging is nuts. Unless Uber is a very large proportion of cars on the road, having any effect on congestion using charges on Uber would have to involve just massive variability in ultimate Uber charges on consumers, which would deter any use of the service. I favour congestion charging, but implementing it on Uber only makes as much sense as imposing congestion charging only on blue cars. 

Update: a reader points out that Uber surge pricing is already a form of congestion charging. It's a good point.

Afternoon roundup

Stories hitting today's mark:

• Can't it be both? NZTA shut down a website offering $20 sober driver services via Facebook. Apparently it's cool to catch a ride with anybody you meet at the bar, but if you want to charge $20 for it, it's illegal because safety. Anyway, taxi driver David Buckingham comments "People thought [closing the page] was anti-competition. The reality is that actually it's pro-safety.". Sounds like the great "More taste" vs "less filling" debates of the 1980s. It's definitely anti-competitive. And maybe it's pro-safety, if people catch a ride in a cab as alternative. If they drive home drunk or catch a ride with a random stranger they met at the pub, perhaps less so. The "More taste" part of the older debate was always pretty dubious too.


• James Moore points to one part of Christchurch's continued insanity: the SimCity precincts. 

  Last month's revelation that the Government - which appears to have taken over the project from the Christchurch City Council for reasons unexplained - is lobbying cinema operators for an on-site art- house cinema appeared to reveal a mood of increasing desperation and unreality.

  Not only would such a development place pressure on what is a confined site, it fails to recognise that when the neighbouring Isaac Theatre Royal reopens next month, it will contain state of the art cinema facilities.

  Two film theatres within yards of each other? Oh please.

  With no firm indications about The Court Theatre's possible return to the precinct and criticisms about the proposed rentals in the music building, the performing arts precinct in its existing form is flopping around the stage like an ageing ballerina attempting a final performance of The Dying Swan.

  Indeed. If investors want to run a second cinema near an existing one, I'd be the last person to complain. But where the government's lobbying them to do it... I'm glad I left. Too much of Christchurch is still the Inside of the Asylum. 


• The University of Canterbury continues to be gifted wonderful headlines about on-campus racism. There really isn't anything new in the story but for this excellent photo of James Graham from 2007, which I'm sure somebody somewhere will somehow find offensive.
  

An Uber experiment

Reason asks an excellent question: is Uber helping to cut drink driving rates in the US? When it's cheaper and easier to get a cab, maybe more people will do it instead of chancing a drive home when they shouldn't.

Reason points to some preliminary work on the topic done by Uber, looking at Uber's entry into Seattle with San Francisco as control. The work's suggestive, but hardly conclusive - especially when there are dozens of cities that could have been chosen as treatment or control.

So, here's the Masters thesis for somebody. Get a city-level panel of DUI rates and of taxi fares. As a first step, just run fixed effects with Uber entry and exit dates. Then run a few more complicated versions, like matching cities by probability of Uber entry based on city characteristics and taxi fares (comparing those of similar ex ante probabilities with different ex post resolution). Or exploit the city-by-city variation in pre- and post-Uber prices. There's loads of potential here, if city panel data on DUI arrests is available. There's loads of wonderful not-related-to-DUI variation in whether cities allow Uber or not making for something close to a natural experiment, though that will be less true if Uber's started using DUI-effects in its lobbying.

In other news, I had my first ride in an Uber cab in Auckland a couple of weeks ago. The cabbie was very enthusiastic about telling me all about it: he's on an hourly rate, but flips to commission when it's busy enough (says he gets 80% of the take). It makes sense that Uber would put cabbies in new markets on hourly to make sure that there's enough supply there when new customers come in.

If you sign up with Uber on code ericc294, you get $10 off your first ride and I get $10 in credit too.

Jitney supply restrictions

Police in Dunedin helped the TaxiCab Federation enforce its entry barriers this past weekend, warning jitneys helping drunks get home.

Police have visited 46 of the 60 drivers identified as illegally offering cheap taxi rides via social media. The drivers received official warnings.

Many claimed they were unaware they were breaking the law, Dunedin road policing manager Senior Sergeant Phil McDouall said.

The Facebook page, ''Dunedin Sober Drivers'', had nearly 2500 members, and detailed those wanting or offering rides to and from destinations.

A 21-year-old female, who regularly used the service, told the Otago Daily Times members provided a safe and cheap alternative to taxis, which were expensive and not readily available in the early hours.

''They do this in other places. I just don't see what the problem is.''

Taxi cabs come under regulations requiring 24-hour dispatch and in-cab cameras; drivers of any commercial passenger vehicle, whether taxi or chartered limo, must have a passenger endorsement on the driver's licence. The passenger endorsement requires sitting an extensive local knowledge test, which is largely superseded by Google Maps, Apple phones, and dozens of models of dedicated GPS units.

Police had safety concerns for vulnerable passengers, including young women and those under the influence of alcohol who might be getting into vehicles with people they didn't know, he said.

The ongoing investigation involving police and the New Zealand Transport Agency (NZTA) comes after concerns were raised by Dunedin taxi drivers.

So it is ok for a drunk young woman to choose a free ride home with a guy she met at the bar, who may or may not be a horrible person, but it's absolutely forbidden for her to engage in an identical commercial transaction unless the driver is a licensed cabbie in a licensed cab. Yes, I know that commercial transactions generally have higher regulatory hurdles than identical 'for free' ones. But the entry barriers here seem higher than they need be.

Here's a description of the local knowledge tests. It costs about $380 for test and study guide.

I can see great reasons for airports putting up great big signs saying something like:

Drivers from the following cab companies only use licensed drivers; their licensed drivers gave passed a local knowledge test. Others cabs may rely solely on GPS.

But making it mandatory for all drivers? Sounds more like a way of restricting supply. A lot of the time, the passengers will be checking the route on their GPS anyway, and especially so in Auckland, where the absolute lack of any logical direct route from the airport to downtown always makes it feel like you're being shafted with unnecessary suburban detours even when you're not.

Or, imagine it this way. Were taxicabs a brand new thing that nobody had ever heard of before, and everybody knew about GPS, would we expect that regulations on taxi drivers would require passing a local knowledge test, or would they require instead that the driver have GPS and an internet-enabled phone allowing for address lookups? Surely this is the kind of thing best handled through brand reputation. If your cab company charges less but has clueless drivers, people will only hire you for routes they know; if your drivers know the best way to everywhere, folks needing that will pay the premium for it.

While I agree that having a knowledgeable driver is a good thing, not all good things should be mandatory. I can't see why it's necessary for drivers offering folks a ride home at the end of the night to have passed local knowledge tests that include where various churches are.

Uber opposition

I'd expected that the Taxicab Federation wouldn't like Uber.

In last week's Herald, they protested that Uber would need to become an Approved Taxi Organisation. [HT: EdBlog]

NZTA [NZ Transport Agency] spokesman Andy Knackstedt said there were many requirements that must be met for establishing a company as an 'Approved Taxi Organisation' such as clearly displaying fares and driver identification, using a tested fare meter and having an in-vehicle security camera system installed.

"If Uber did not establish themselves as an ATO, they would rely on existing ATOs and their drivers integrating or using their system," Knackstedt said.

...

University of Canterbury senior lecturer in economics and transport commentator, Eric Crampton said Uber may be able to side-step taxi industry regulations by hiring drivers with a P endorsed drivers' license and using unmarked vehicles to operate as a 'private hire service'.

"Current cabbies could flip to Uber in their own cars, retired cabbies who still have the P endorsement could start up again, and others willing to sit the test could come into the market," Crampton said in his blog.

The New Zealand Taxi Federation has voiced safety concerns about the growth of app-based taxi booking systems becoming available around the country.

Other transport apps to launch in New Zealand recently are Zoomy, in use by taxi organisations, and Cab Chooze, along with other apps developed for taxi companies.

In a letter to the NZTA, Taxi Federation executive director Tim Reddish called for the apps to be shut down until the companies prove their drivers are properly licensed and operating under the control of approved ATO's.

"In our view any app-based taxi service delivery system must also ensure that customers are protected from unlicensed drivers and untested as fit for purpose vehicles," Reddish said.

Again, I am not a lawyer. But it looks to me like Uber could run under existing private hire service regulations. I expect that the Taxi Federation will do their best to block it.

If I were the Taxi Federation, I'd be claiming that an app-based immediate hire is a lot more like flagging down a cab than it is like an advance booking; if I were Uber, I'd say it's rather more like calling a bunch of car companies to see who'll give the best rate. I think the latter's the more accurate description and that the private hire regs could then apply, but again, I'm not a lawyer. If running as a private hire service under Section 6 hits the 'too hard' basket, Uber could still come in as an app booking system for more standard cabs, but we'd lose much of Uber's benefit: the ability to surge supply into the market with higher fares during periods of anticipated high demand. It's harder to bring part-timers into the market when they'd need to be running a signed, metered, and camera-equipped car.

And a big thank-you to Daniel Lynch at the Herald for doing this properly. He quoted from the blog while linking to it to provide context for those wanting the additional context. Nice job!

Auckland Uber

So Uber's looking to expand into Auckland. This is great news.

I had thought that regulations around taxicabs might stop them.

Any taxicab in New Zealand must have 24-hour dispatch and must have a suitable camera monitoring device. Any vehicle that can be flagged down counts as a taxi. Uber's dispatch system might count as suitable 24-hour dispatch support, but the camera installation would block any part-time folks from entering the market with their own vehicles.

However, there's also a very nice "Private Hire" designation. Those vehicles cannot accept casual hires but must instead be booked in advance. I expect that Uber's booking service would meet this requirement, but I am not a lawyer. The driver may not use a taxi meter to determine the fare - again, Uber should be fine. Drivers would need to put up a driver identification card, and Uber would be responsible for ensuring that these meet spec. Sections 3 and 6 of the Code would apply.

I expect that drivers would have to get a P endorsement on their drivers' licences, which requires taking a course and passing a test. So current cabbies could flip to Uber in their own cars, retired cabbies who still have the P endorsement could start up again, and others willing to sit the test could come into the market.

I also expect the Taxicab Federation to have a fit and demand that Uber come under taxi licensing.

Auckland Uber, after all.

That supply not enter the market

In response to a few attacks on taxi owners, New Zealand three years ago started requiring that all cabs have cameras and be on 24-hour monitored dispatch.

I expected that this was a move towards cartelization that would have bad effects on consumers. I'd written:

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.

I figured that this would have most effect around the time of the Rugby World Cup, or other big events that would otherwise bring jitneys into the market. Looks like it's been worse than I expected.

The Herald reprints a piece from The Star:

A lack of taxis in some parts of Christchurch is causing major problems for evening revellers trying to get home safely.

The drop off in taxi numbers is leaving agitated people outside pubs, leading to fights and tempting people to drive home after drinking.

Some taxi drivers are refusing to go to the eastern suburbs because of concern about damaging their vehicles on quake-damaged roads, which is compounding the problem.

New Brighton's Pierside Cafe owner Tony Brooks said since the earthquakes they could not get taxis to take their patrons home.

Security staff, bar managers and DJs were driving patrons home.

"This has been an issue from the moment the earthquake hit - this is not just a little problem, this is a big problem," he said.

"We had Midge Marsden here on Saturday and it was an amazing gig - but it was all soured at the end of the night by the lack of taxis," he said.

Mr Brooks said he had been pre-booking taxis for when the bar closed at 1am but they never turned up.

People were driving home drunk as a result.

Taxi companies say tougher regulations and costly maintenance on vehicles because of damaged roads meant six operators had stopped since the earthquakes.

Blue Star Taxi's general manager Bob Wilkinson said: "Part of the issue is the way the bar scene has split, now the hotspots are in Riccarton, Lincoln Rd and Merivale and The Palms and it is pretty hard to cover all of those areas instead of just the central city before the earthquakes.

"Six taxi companies folded because new regulations mean they had to have 24-7 rosters, cameras in cars, a phone room and this added to the cost of running them."

First Direct's owner Pam Jackman said: "Our drivers don't want to go out to Brighton because of the roads." Ms Jackman said their taxi could do between 1000 and 3000 kilometres a week.

Ferrymead's Speight's Ale House restaurant manager Joseph Poulter said the most frustrating thing was waiting for the taxi companies to answer the phone on a Friday and Saturday.

"We just give up and try another number," he said.

Mr Wilkinson said there were only three major taxi companies left in Christchurch which were covering a city once serviced by more than nine.

You'd normally expect that shortages like this would bring new supply into the market: people who'd charge a fair bit to run cabs from the Brighton bars late in the evening. Pull the kid seats out of the back of the van, slap a sign on the side, and offer fixed-price fares to different parts of town. But not if you also have to run under dispatch and cover the costs of a camera setup.

I wonder whether private-hire vehicles are still exempt from the regulations.

Not an equilibrium

So taxi cab tips are up consequent to a new credit card swipe system that encourages large tips. Cheap Talk and Marginal Revolution have both noticed.

Here's Alex Tabarrok:

Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.

But does this make the drivers better off? Not unless they own the taxi medallion!

Joshua notes that the new charging system started in 2007.

Recall that New York City taxicabs are heavily regulated: the right to run a cab has to be purchased. The medallion giving you the right to run a cab is expensive. The 2004 annual report of the Taxicab and Limousine Commission gives the price history from 1947 to 2004.

They stopped publishing that graph in subsequent years' annual reports, but they do report average sale prices:

• 2005: $350,000 individual, $391,000 corporate
• 2006: $411,000 individual, $525,000 corporate
• 2007: $420,964 individual, $573,489 corporate
• 2008: $550,000 individual, $747,000 corporate
• 2009: $584,000 individual, $775,000 corporate
• 2010: $624,000 individual, $850,000 corporate
• 2011: $699,000 individual, $1,000,000 corporate
• 2012: Average annual prices are not yet available. 

Every year when I teach my public choice class, I look up the taxi medallion price when I lecture on transitional gains traps. And I've been a bit puzzled about why the prices seemed to skyrocket during the 2008 recession and onwards; the top line of the graph above, $350,000, seems pretty low compared to where things are now.

I added red bars at the bottom of the chart above for NBER recessions, although the really poor resolution on the original PDF makes identifying years a bit tough. Note also that the first few years aren't to the same scale as the rest: 1947, 1950, 1952, 1959, 1960, 1962, 1963, then annual ticks thereafter. You can really see the dip from the 1991 and 2001 recessions, though the latter recession's dip started prior to the recession. But the 2007-2009 downturn was surely larger than the prior recessions, and was accompanied by a strong increase in medallion sale prices. This puzzled me until now. The present value of the potential rents increased with the new fare system, so medallion prices went up.

This surely then was accompanied by an erosion in non-tip payments to drivers since the market for driving cabs is competitive, even if the right to run a cab isn't. This is my prediction; I haven't been to New York in a while. Maybe somebody who knows can tell me whether I'm on the right track. 

Medallion economics

Sam Morgan tweets (1, 2):

Sydney Taxi Economics: 2 drivers, 24hrs a day. Owner of $170,000 taxi license rents car for $1550 per week. Revenue ~$3500 per week. $1000 income per driver per week.

$1000/((24*7)/2) = 84 hours. $11.90 per hour. License owner yields $80,600 p.a. on $170,000 licence.

I'm not sure from where Sam sourced his figures, but if they're right, that's a very good annual return on investment. Sufficiently high that I wonder why more folks don't invest in medallions.

Let's work some of that back though. Suppose a car costs $60k and fully depreciates after three years if driven 24/7. So deduct $20k per annum from the revenue stream. Maybe another $7.5k in maintenance, vehicle registration fees, and car insurance [all of these are just guesses]. But even that still keeps us north of $50k p.a. on $170k licence. Add in a bit in management costs for the license-holder: ensuring the drivers aren't beating up the vehicle too much, replacing drivers if one leaves and so on. Is the rest regulatory uncertainty or have I missed some costs facing license-holders? Or, to put it another way, should I be trying to buy taxi licenses?

Defending the taxi cartel

The new taxicab regs are soon to take effect. From the first of August, cabs will have to have video cameras and be on 24-hour monitored dispatch. I'd suggested that security had bugger all to do with the regulatory move and that it was just an effort at cartelization by the Taxi Federation.

And now we hear rent-seeking Taxi Federation head Tim Reddish whining that jitneys may have found a loophole: if they register as private hire, they're exempt from the camera regs.

But many taxi companies are struggling with the extra cost of the measures, so are becoming private hire services in a bid to save money, the Taxi Federation says.

In a bid to stop rogue operators, federation executive director Tim Reddish has written to Transport Minister Steven Joyce warning that "the natural flow-on from this will see the emergence of an "under the radar' mini-cab type operation that will have the potential to decimate the legitimate and fully compliant taxi industry".

Under operator licensing legislation, private hire cars must not be metered – instead carrying passengers at an agreed price – and they must also be prebooked.

But an article in the federation's industry magazine says taxi companies are ditching their approved taxi operator status and switching to private hire to avoid the new measures.

"Taxi companies ... convert to private hire in the belief they can do much the same thing without complying with existing taxi laws, let alone tough new rules on security cameras, dispatch systems and duress alarms."

Have no fear, the government will act to protect the cartel:

Transport Agency spokesman Andy Knackstedt said most private hire operators were legitimate services like limousines and wedding vehicles, but the agency was "focusing our attention" on the small number of services "competing illegally with approved taxi organisations by accepting casual hires without the prescribed requirement for a prebooking".

A separate operator in Palmerston North was prosecuted and fined $6632, with a month's suspension of his commercial drivers' licences.

"Where we find evidence of such illegal operations we will undertake prosecutions."

Mr Joyce said he was looking into the industry's concerns.

HT: @HerrSchnapps

The safety regs are less a barrier to entry than nonsense taxicab medallion systems that limit the maximum number of cabs in an area; fortunately, the cartel hasn't yet successfully argued for those in New Zealand. I think Joyce is too sensible to be swayed by that blatant of rent-seeking; the safety regs came in on the back of a couple of nasty incidents of violence against cabbies and the usual "Something Must Be Done". It would be harder to get public support for full cartelization.

There's an awesome spot in the market for the private hire company that figures out an Android/iPhone dispatch system: it could totally satisfy the regs and would beat standing at a corner or looking for a taxi stand. Unless the Taxi Federation prevents that kind of competitor from emerging.

Ok, who hit the stupid button this morning?

Front page of today's Christchurch Press urges the adoption of warning and nutritional labels on foods:

A warning that alcohol is bad for you will appear on glitzy liquor and wine labels if proposals for trans-Tasman food labelling laws are adopted.

An alcohol warning is one of many proposals made by an independent panel, commissioned by the Australia and New Zealand Food Regulation Ministerial Council.

The panel also recommends fast-food outlets highlight the calorie counts of their burgers, chips and other foods.

The Press then goes to the usual suspects for comment about how critically important this move is. Except that we already know it doesn't work. People do not change behaviour when they read the calorie counts on fast food. Some eat more, having previously figured fast food had to be really really full of calories and being informed that the calorie count isn't as high as they'd previously thought. Evidence is accumulating.

Canterbury Community and Public Health nutritionist Janne Pasco said people would be "astounded" to see the calorie content of fast food.

Yup - it's not as bad as you'd thought, so have more.

Lion Nathan, one of the two big NZ breweries, has moved defensively:

In response to the report, brewer Lion Nathan promised to "voluntarily adopt consumer health messages that support responsible drinking choices, including during pregnancy".

The real killer though would be if they forced calorie counts on beer. That's a reasonable fixed cost. Lots of the smaller brewers here do unique one-offs that might well not be economical if they had to submit all their brews to nutritional analysis. And that's the Commission's Recommendation 26. NZ's craft brewers might want to keep an eye on this one. How much does it add to the cost of your new seasonal brew to have to submit a sample to the lab at time of bottling, wait on results, print up new labels with the calorie count, then label before shipping? This pushes brewers to having a set stable of beers rather than interesting and changing portfolios.

Any chance the brewers will be allowed to note the health benefits of moderate drinking on their bottles while putting on the official warnings?

The Commission also recommends mandatory GE labelling - tough call when there's easy potential for unintentional presence. Who bears the lab costs? Doesn't it make more sense to run certification for those wanting to advertise as GE-free for folks with strong preferences? It's not like non-organic foods have to advertise the pesticides that have been used.

Item the second. Wellington taxi companies try on having the City Council cartelize them, and Council seems interested. Fortunately, they may not have the power to do it directly. Here's the Dom:

There are too many taxis in Wellington and it is time to put a limit on them, the mayor says.

The taxi industry agrees and has called on the Government to introduce legislation to cap or reduce numbers in the city.

Celia Wade-Brown believes part of the problem stems from "overqualified" immigrants being funded by Work and Income into an industry that has hit saturation point.

"There seem to be too many for the city and they aren't getting a good living wage in some cases."

The New Zealand Transport Agency issues taxi licences, but legislation that deregulated the industry in 1989 does not allow the agency to set limits.

There are 1237 taxis licensed for Wellington City. About 400 were on the road before deregulation. This tripling of taxis in the past 20 years has led to overcrowded taxi stands and dubious parking practices as drivers clamour for business, especially in the late-night Courtenay Place party zone.
...
Mr Tyler [Taxi Federation Wellington branch secretary and rent-seeker] said the only solution he could think of for Wellington's taxi congestion woes would be for the Government to introduce legislation to cap the number of taxis at current levels.

"It would mean they [NZTA] couldn't issue any more licences in Wellington until it could be demonstrated that there is a need for it."

A less palatable option would be to return to full government regulation, which would pre-set cab numbers.

"Then they would have to reintroduce fare fixing. If you are going to limit the supply, then you have to control the costs as well."

Fortunately, it seems illegal for NZTA to set quantity restrictions. But you can have similar results by ramping up compliance costs, like they did last year with mandatory cameras. If any other industry made a bunch of claims that amount to "Please help turn us into a cartel", would NZ journalists take it at face value?

UberCab update: Transitional Gains Trap sets in

Remember UberCab? Well, the taxi cartel has pushed back, predictably, to protect their rents.

Did Ubercab just crash and burn? Taxi and limo industry insiders in California today informed TechCrunch that the San Francisco Metro Transit Authority & the Public Utilities Commission of California have ordered the startup to cease and desist.

UPDATE: Since the orders arrived on October 20th, Ubercab has remained in service under threat of penalties including up to $5,000 fee per instance of Ubercab’s operation, and potentially 90 days in jail per each day the company remains in operation past the orders.

The Cartel's complaints?

Ubercab operates much like a cab company but does not have a taxi license.
Its cars don’t have insurance equivalent to taxis’ insurance.
Ubercab may threaten taxi dispatchers’ way of earning a living.
Limos in U.S. cities usually have to prebook an hour in advance, by law, while only licensed taxis can pick someone up right away but Ubercab picks people up right away (again without a taxi license).

I'd put 70% odds on this kind of thing in my prior post.

My final lecture in Intermediate Micro was on monopoly. I suggested that if we really care about getting rid of monopoly problems, one of the first things that government should be doing is to stop supporting monopolies and cartels that they've created through regulation. But that's unlikely to happen.

HT: Reason.

Innovations unlikely to reach NZ: Taxi edition

Dispatch? Who needs it when you've got an iPhone app?

UberCab contracts with black car services – mostly Towncars and Escalades. There’s a lot of unused inventory in those businesses and they are happy to work with someone who eats up that inventory. As a user you download an iPhone app (I have it on my iPad) and add your credit card information (that’s the last time you ever have to deal with that). When you want a car to pick you up you hit a button. The app knows where you are and finds a car and driver nearby. The driver accepts via his/her own iPhone app, and you then get to watch them come to you on a map with a pretty darn good estimate of the number of minutes it will take for them to get there. When they arrive you get in the car and tell the driver where you want to go. When you get there you see the charges and accept them, which are then billed to your credit card, tip included. A receipt is emailed to you. And then each side gets to rate the other – I love the fact that the driver rates the passenger, too. Makes for good tips and a happy overall transaction. Watch a demo video here.

When I tried UberCab a few days ago I had to wait just 5 minutes for the car to arrive (a big Mercedes), and the overall experience was way better than a taxi.

The charges are 1.5x taxi rates, and it’s worth it. You’re in a much more comfortable car and you don’t have to waste time finding a cab in the first place, a real problem in San Francisco. I’ll use this all the time now when in San Francisco.

The company is planning to expand to other markets, so you may not need to wait long to use it (and if they move too slow, others will pop up anyway).

But here’s where things get really interesting – the difference between UberCab and its various competitors is that the driver uses his own iPhone app, not some clunky one-use device installed in his car. That means there’s no technical barrier to anyone becoming an UberCab driver. Which means that anyone with a car, theoretically, could join the network and start picking people up.

Well, theoretically at least. But in NZ, they'd also have to install a suitable camera monitoring device for their cars and have appropriate radio dispatch support. Maybe a NZ implementation could provide sufficient radio support to make the regulators happy.

The system may also provide an end-run around some cities' medallion schemes (please don't ask me which ones), which prohibit non-medallioned cabs from picking up folks flagging down cars but allow other commercial driving.

In most cities today you need to purchase or lease a medallion to drive a taxi. That’s just a way of keeping out competition and keeping rates high – it has nothing to do with making sure only qualified people drive those cars. In most cities you can drive people outside of taxis but you can’t let them flag you down, a big competitive disadvantage. With UberCab they’ve solved that problem – click a button and car arrives in a few minutes wherever you are.

Instead of looking for pedestrians to flag you down, wasting gas and not being the safest road aware driver, UberCab drivers will just park near where they know that a lot of clicks happen and watch their phone, bidding and grabbing those nearby clicks as they come through.

I can imagine it now – click a button and see a variety of options. A five star rated driver 15 minutes away in a late model Prius at 2x taxi rates, or a 1975 Camero 1 minute away with a three star rating for .5x taxi rates. Choose your car, driver and price and get exactly what you pay for. And help break the back of the taxi medallion evil empire.

So, if the system does in fact allow an end-run around the regulation, does this lead to an erosion of the value of medallions to the point where they're irrelevant or an extension of the regulations to prohibit non-medallioned cabs from using UberCab? I'd pay $0.70 for a contract paying $1 in the event of the latter.

And, I'd pay WAY more to ride in a '75 Camaro than to ride in a Prius. Bonus points if the driver has a mullet and the radio plays nothing but Starship. Sometimes, heterodox preferences let you get at a discount things for which you'd be willing to pay a premium.

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.

Taxis in cities to see less competition

Paraphrasing, with some details changed from original for accuracy, below:

Taxis in cities to get cameras less competition
NZPA | Tuesday August 10, 2010 - 01:02pm
Taxis in large towns and cities will be fitted out with security cameras from next year in an effort to improve safety restrict entry by new cabs during periods of peak demand, Transport Minister Steven Joyce says.

The cost of installing and operating the cameras will fall with taxi companies and drivers., ensuring that large operators enjoy a differential advantage over small independent owner-operators and ensuring that jitneys fail to come into the market during the Rugby World Cup.

The cabinet had considered the issue and decided to mandate cameras in taxis; while companies could choose to install their own cameras were safety issues paramount, cameras could only deter entry by jitneys if they were made mandatory.

Measures to tighten telecommunications requirements for taxis have also been approved to ensure drivers have around the clock communications support jitney drivers don't enter the market at times of peak demand.

Taxi drivers working environments were no longer as safe as they once were, Mr Joyce said.

Since 2008 there had been a number of serious attacks on taxi drivers, two of which resulted in death.

Cameras were used in taxis in Australia's main cities.

"Overseas experience suggests that in-vehicle cameras could reduce violent and serious crime in taxis by 70 percent and taxi fare evasion by 70 percent," Mr Joyce said. "However, that not all cabs have voluntarily installed cameras suggests that these safety gains are not particularly valued by drivers given the cost of installing cameras. The real gains - the gains that come only through regulation - are the conferring of rents."

"In-vehicle cameras are widely supported among the industry as a way of preventing competition by new rivals, and while drivers can never be 100 percent safe, these measures will make a significant reduction to the risks competition that drivers face."

The law was expected to be in force by the middle of next year, in time to ensure that peak demand during the Rugby World Cup would provide rents to full time operators rather than drawing new cabs into the market.

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.

Transitional gains traps

I'm wrong about this, but I don't know why I'm wrong. I know that I'm wrong

1. Because it's never been done and
2. Because Tullock says there is no solution

But I don't know why I'm wrong. Maybe you can help me out.

Tullock in 1976 wrote about the Transitional Gains Trap. Suppose that the government puts in place a regulation that confers rents on a few companies. So each of those companies earns an extra $1 million per year, now and forever. The value of the new rental stream has to be capitalized into the price of the fixed asset that draws the rent. And so New York City taxicab medallions, which give their owners the right to run a vehicle as a taxicab, sell for about $750,000. The link is from the homepage of a firm that provides loans to help folks buy taxicab medallions. And in Canada's ridiculous dairy quota management system, the right to milk a cow costs about $25,000. The value of the rent gets capitalized into the asset that's in fixed supply: the permit to run the cab, the right to milk a cow, the land that's eligible for tobacco growing, and so on.

After that capitalization has taken place, the person benefiting from the rental flow is again earning only a normal rate of return on his investment. All of his gain was transitional: the rent-seeker gets a one-off increase in capital value, but no ongoing benefits. Of course, over time, ownership changes; the new owners never enjoyed the transitional gain and earn only a normal rate of return.

Tullock says that, as consequence, reform is well-neigh impossible. While the folks getting the rent are not made better off by it, getting rid of it would impose massive capital losses on them; they'll then lobby up to the expected value of the capital loss to prevent it. And, he says further that there's no way out of it.

The solution seems remarkably simple in principle; since it's not been done, I must be wrong.

For New York Taxis, the City of New York stumps up to buy out all existing medallion holders at a price equal to the average selling price in the quarter prior to folks started talking about a buy-out. They finance this rather large purchase ($750K times about 13,500 licenses = $10 billion) by a bond issue. They then put in place a specific sales tax on taxi rides that leaves the post-change price lower than the prices charged under the medallion system but nevertheless is sufficient to pay off the bond because of reduced deadweight losses and increased numbers of cab rides. The tax expires when the bonds are fully paid off.

The scheme compensates the losers from the change by a tax on the beneficiaries. In the absence of companies that exist solely to facilitate medallion sales, it would be Pareto efficient; instead, it's likely only Kaldor-Hicks. We could imagine some compensation to Medallion Financial Group, though, that would still make the whole thing Pareto.

In the Canadian dairy case, it would be much more complicated because of the way that the Canadian system runs cross-subsidies from "industrial" milk to consumer fluid milk: the tax would have to be on the portions of milk sales that currently earn a premium. Otherwise, it would be similar but would cost a lot more -- best guess, around $25 billion. 978,000 cows * $25,000 per permit.

Think about those numbers. The capitalized value of the rents conferred by the Canadian dairy system and the New York City taxicab system together amount roughly to thirty percent of New Zealand GDP. Ugh.

Ok, so why am I wrong? It looks Pareto to me. What am I missing?