Market Forces: Should a taxi ride cost even more?

In the rain on Wednesday night, I got a cab home from the city – a $15 fare. Near my house the driver had to turn from a busy road into a side street, across oncoming traffic.

As the windscreen wipers flicked back and forth, the oncoming headlights of a bus distorted into a kaleidoscope of colour in the raindrops. At that exact moment, the driver took his foot off the brake and began to make his turn.

Every muscle in my body tensed and I opened my mouth to shout something, but then he stopped again. The bus had to swerve past the yellow bonnet of the car. Once it was gone the driver proceeded.

And I’d rate this guy as one of the better drivers I’ve had in recent times. At least he didn’t drive on the footpath.

So when the state government announces it is raising the fares on taxis, what do I think? I say thank god. Let’s make driving a taxi rewarding enough that people with a will to live and proper skills want to do it.

The government is proposing to raise flagfall from $3.20 to $5.20 after 5pm and to $6.20 on Friday and Saturday nights.

Image
A sheltered industry

The market for taxis has long been a mess. A big part of the problem is the lack of actual market forces. The industry has long been regulated to within an inch of its life. The biggest single rule has been a cap on the number of taxis in Melbourne, that drives up the value of a cab.

The licenses (aka plates, aka medallions) that permit you to have a taxi in Melbourne are worth hundreds of thousands of dollars. The owner gets half the money you pay. The value of the medallion exists only because the number of taxis is regulated.

As the medallion owner reaps return on the investment, the cab driver gets screwed. An Age journalist recently trained and worked as a cab driver and made $8 an hour for his troubles.

One of the reforms proposed by the Victorian government’s taxi review was for the split of revenue to change from 50:50 to 55:45. A ten percent increase for the driver is hardly earth-shattering, but it has been opposed by the Victorian Taxi Association. That is the peak body for the industry. Unsurprisingly, it doesn’t effectively represent the users of taxis or the casual drivers. It is backed by the money.

It also opposed the big reform proposed by the taxi industry review, increasing the number of cabs in Melbourne. Despite its arduous work in representing the interests of the medallion holders, that reform has driven down the price of a taxi license. (In 2012, licenses were changing hands for as much as $500,000.)

Image

The government has agreed to a clever approach – leasing 12 month taxi licenses at $22,000 a year. This price is indexed at below the rate of inflation. The eventual effect is that the price of a taxi license approaches zero, and the market is no longer held hostage by the medallion holders.

The other big change that is being stealthily introduced is deregulation of fares. Part of the problem is that a taxi is just a taxi. There’s no easy way to get a good one. No way to offer a better service and charge a higher price.

Quality lottery
Another yellow ball bouncing round the barrel of the quality lottery

But in country areas, the government is introducing a rule that allows taxis to set their own fares. I see a link with today’s announcement. Might higher fares in the city build a consensus that really, deregulated fares are the desirable outcome?

Hopefully by that point, the taxi industry as we know it will cease to exist anyway. The hire car and limousine market has also been given freer rein under these reforms. Hire cars differ from taxis because they cannot pick up fares on the street –  they have to be booked. Pre-smartphone, this was an impediment. Now booking your ride is only an app away.

The biggest player in this space is Uber.  It started as a a way for towncar and limo drivers in the US to make money in their downtime, and is now available worldwide. The little car-hailing company that could is now worth an estimated $3.5 billion. According to their website, riding from my house to the city could cost as little as $10 and you might end up riding in a Prius or a Mercedes.

If they put our yellow cabs out of business, I won’t shed a tear.

Published by

thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

7 thoughts on “Market Forces: Should a taxi ride cost even more?”

      1. You always see that there’s surge pricing before you book though, and I’ve never seen it in effect for more than one car type at a time. To explain that, since it probably hasn’t hit Melbourne, here in San Francisco you can book Ubers of different levels – lowest is a cab just booked through Uber, then UberX, which is a nice but random driver-owned car (Prius, etc.), then the original luxurious, black town cars, then SUVs. One of them might be on surge occasionally, but not the others. Wouldn’t want to count on New Years, but for most days…!

        Like

  1. I dont think the problem is the pricing. I live somewhere where the pricing is ‘deregulated’ as you put it-ie there is no cap on cabs or fare price. Accordingly youd probably be horrified at the price of a cab-it doesnt drive in more competitive behaviour on pricing. Addititonally you can just as easily get a good or bad cab driver. Depends on the driver not the price or the company. Isnt the problem more who is driving our cabs? Poor english skills? Typically hail from places where road rules are nonexistant?as you put it a ‘low income’ job which means skilled workers arent about to take it up…etc. or is it in fact the environment in which they drive?…Melbourne’s roading layouts are ‘interesting’ at best. Also the street lighting there is really poor (to your point about the weather)

    Like

  2. Nice post Jason. Although, I think the price of licences won’t approach zero. They’ll just reach an equilibrium price equal to the NPV of the stream of payments a licence holder could receive in leasing out the licence. That annual payment will essentially be capped by the annual fee you could pay to government.

    Like

  3. Nice post Jason. Although, I don’t think the price of licences will approach zero. It’ll just reach an equilibrium price equal to the NPV of the stream of payments a licence holder could receive in leasing out the licence. That annual payment will essentially be capped by the annual fee you could pay to government.

    Like

    1. Quite true. I suppose I meant that in the very long run if you index that fee at less than inflation, the real value of the fee will approach zero. In the very long run…

      Like

Leave a Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s