Commentary: Taxis, regulators must adapt for industry to survive

Drivers with the Taxi Workers Alliance of Pennsylvania protest on Oct. 8, 2014.

By Michael Farren

Some dinosaurs escaped extinction at the end of the Cretaceous Period 65 million years ago by evolving into birds. Taxi companies around the United States face a similar cataclysm today, thanks to upstart ridesharing companies Uber and Lyft. Like the dinosaurs, taxis must adapt or die. Unfortunately, cities like Philadelphia, Los Angeles, and Chicago are holding onto regulations that will seal the taxis' fate.

Ridesharing's rise has been as unexpected and tumultuous as the dinosaurs' demise. Though the industry is barely five years old, ridesharing drivers already outnumber taxi and limousine drivers by at least two to one nationally. Data from cities around the country show that ridesharing - while not completely replacing taxicabs - is substantially eroding the industry's business, even as it grows the overall size of the market.

Recent research by myself, Chris Koopman, and Matt Mitchell at the Mercatus Center at George Mason University illustrates how the taxi industry has fallen into a trap of its own making.

Since the Depression, taxi companies have lobbied for regulations that stifle their potential competition. For example, the Philadelphia Parking Authority (PPA) limits the number of taxicabs that can provide service by restricting "Certificates of Public Convenience and Necessity" (COPC). Other approaches, like allowing only certain kinds of taxicabs or dictating the minutia of how to provide service, can raise rival companies' costs, leaving more established companies relatively unscathed.

The result is monopoly-like power for established companies. Regulators attempt to mitigate this with price controls and quality standards, but industry insiders are often able to influence the final regulations so they end up serving special interests rather than controlling them. Economists call this counterintuitive result "regulatory capture." In the end, taxi regulations create a stagnant market with little opportunity for entrepreneurs.

Our research shows that even Washington's relatively light taxi regulations can increase the cost of starting a taxi company by nearly $2,650. This doesn't count the 33 extra bureaucratic hurdles that an aspiring driver must jump over.

By comparison, the PPA's taxi regulations are fairly draconian. For example, the PPA also limits COPCs for taxi dispatchers, thereby controlling the primary source of customers for taxi drivers. This inhibits competition by restricting entry to the market - a taxi driver co-op was denied authorization as a new dispatcher for six years. The PPA only granted them licensure in 2015, after being threatened with a discrimination lawsuit.

Not to be outdone, New York, Chicago, Boston, Seattle, Kansas City, and Miami-Dade County also limit the number of taxi licenses they issue.

Even worse, taxi companies in St. Louis, New Orleans, and Los Angeles, like Philadelphia, must convince regulators that there is a need for their service by applying for a COPC. Adding insult to injury, established taxi companies can protest the applicant, forestalling competition by entrepreneurs.

Incredibly, taxi drivers don't even benefit from anticompetitive regulations. Most of the value of the monopoly privilege is incorporated into the sale price of the taxi permit - an effect that economist Gordon Tullock called the "transitional gains trap" - so only the original owners really benefited.

In short, taxi drivers are pinned between an outdated regulatory rock and growing competitive pressure from ridesharing companies.

Not all hope is lost, however. A number of governments are treating the rise of Uber and Lyft as an opportunity to correct the problem. San Diego, Milwaukee, and Portland have ended their limits on taxicab permits. Montana just repealed the requirement for taxi companies to have a COPC. San Jose and Miami have reduced regulatory burdens. Dallas and Fort Worth have removed most regulations and created a level playing field for taxis and ridesharing companies.

Other governments, including those in Evanston, Ill.; El Paso, Texas.; Orange County, Calif.; and the state of Pennsylvania, are actively considering deregulation. State legislators in California, Texas, and Missouri have even proposed mandating municipal deregulation.

In some cases, the regulators themselves are advocating for deregulation. Robert Spillar, director of the Austin Transportation Department, requested that his city council consider the repeal of taxi franchises. And Richmond's Capital Region Taxicab Advisory Board, in an effort to help taxis compete with ridesharing, voted itself out of existence.

Civic leaders ought to embrace this opportunity like governments in the Sunshine State, Florida, where the city of Melbourne and counties of Sarasota and Collier fully repealed their taxi regulations. At the very least, policymakers should eliminate any regulation that doesn't clearly identify and quantify the problem it intends to solve. Any regulations that do remain should focus on the desired outcome, not the means to accomplish it, to allow entrepreneurs to find the best and least costly manner of compliance.

Taxis face a choice - adapt or die - but their self-imposed regulatory shackles have fossilized the industry. Their only hope is to beg the regulators for mercy. It might not be too late to evolve and avoid the dinosaurs' fiery fate.

Michael Farren is a research fellow with the Mercatus Center at George Mason University and coauthor of the new study "Rethinking Taxi Regulations." mfarren@mercatus.gmu.edu

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