Taxi Licences – a gross market distortion

According to an article in todays Age newspaper in Melbourne “Taxi licences have soared in value, jumping from $123,000 in 1989 to $474,390 now.” However this is not an issue unique to Victoria. Across many of Australias major cities obtaining the right to operate a taxi costs something similar to a suburban home. And that is merely the cost of government permission before you even pay for the vehicle and accessorites. This absurd situation has created a whole class of investors that own and trade licences and who have a vested interest in retention of the system. However it all comes at a significant cost to customers in terms of taxi availability. And even though taxi fares are generally regulated the viability of the industry demands that the fares set must accomodate the licensing costs. So consumers get a lower level of availability than they might otherwise and they pay a much higher price. All round the consumer is a big loser. An article last year in the Sydney Morning Herald suggest that in NSW the “cost to the consumer of excessive restrictions on taxi licence numbers is about $800 million per year“.

30 thoughts on “Taxi Licences – a gross market distortion

  1. Taxi drivers protested at the WA parliament against introducing second tier peak time taxi licences.

    I completely disagree with the closed shop protection racket that the taxi industry enjoys, however it is difficult to not have some sympathy with drivers who are in hock for hundres of thousands if it were to be abandoned over night. The state should buy back the licenses and simultaneously deregulate it, with little more than a police check and registration of taxi drivers requireed (if that).

  2. Brendan
    your argument would make more sense if talk of deregulation hasn’t been around for almost the last 10 years. the taxi drvers should have known what they were getting into. But they figured they’d take a punt anyway and pay it off and sell before the whole Ponzi scheme fell apart. Why do you abandon your generally absolutist perspective in this case? Caveat emptor, I have no sympathy at all. By the same logic the North should have compensated all the slave owners after the Civil War.

  3. In many 3rd world countries where these sorts of crazy rackets exist (and not just the poorest ones) people simply start up unofficial businesses that basically work as taxis. It also happens in high density cities in some rich Asian cities, where individual apartment blocks (perhaps a thousand people) have their own private buses and sometimes private cars too. I wonder if there are innovative methods that you could use to start a taxi business in Australia to try and get around this legislation.

  4. Jason even if you have no sympathy for the license owners there are still in my mind two key issues. Firstly given the state of the law if they hadn’t acquired and or held the plates during the last ten years we would have been without taxis, so they were not the sole beneficiaries. Secondly ending the regime without compensation would have a very high political cost. I don’t personally blame the taxi drivers/owners. I blame the government.

    Politically I think the simplest action is to decide that the government will issue as many licences as there is demand for at a fixed price of say $400k (or whatever the prevailing market price is) and to stipulate clearly in legislation that the nominal price will fall on 1 January every year such that the fee is phased out in equal steps over the next ten years. Its not ideal but it would get the job done.

  5. Issue 10% more licences each year in an auction. Do so until they can’t be given away and then abolish them. Do this with pubs as well, and everything else that has a licence or a quota.

  6. Jason,

    I don’t generally blame rent seekers for seeking advantage, it is human nature to try to take advantage of a system and defend your own privileges. It is wrong for the state to create the situation where taxi drivers can benefit, but the cost of over night deregulation would be significant, with perhaps a period where there are no taxis. Compensation or Tim’s suggestion is a compromise way forward.

  7. The only cost I can see with an overnight deregulation as suggested by Jason is for a lot of angry license holders. In political terms that might be tolerable except for the fact that few people are going to see it as fair once the media puts a personal hardship spin on it. However if the only constituent that matters is consumers then Jasons approach makes sense.

    The injustice in ending such a scheme overnight isn’t really any more or less than the injustice in removing an import tariffs overnight. In both cases people have invested a lot in the expectation that the policy won’t change.

  8. Brendan,

    I might note that your argument applies equally as well for all the businesses that benefit from government subsidization, whether direct or indirect. I good example here is child-care. Should all the child-care providers get some compensation if the government stops subsidizing parents?

  9. Pingback: Club Troppo » Missing Link Daily

  10. Tim,

    Your suggestion at #5 is not that different to my suggestion at #4. However you target a quantity whilst I target a price. Is there a reason that you prefer the former? I’m inclined towards the latter because it removes any political spin about unforseen consequences for the license investors down the track and it defines a clear end-date to the phase out. If anybody else has a view either way I’d be keen to hear the arguments.

  11. What’s going on now is the result of losing the plot, the equivalent of lifting with your back. Taxi licensing, like licensing bootblacks, was originally introduced to stop anonymous operators opportunistically attacking vulnerable members of the public and robbing them (that’s why the same licensing authority deals with both in London, something that looks as odd as the way Wimbledon deals with both tennis and croquet if you don’t know where they are coming from). It was the “good bacteria” principle, condoning a certain amount of premium on what the public paid in return for something self-policing because the alternative – taxing the public and paying for policing – simply didn’t work. This did, by creating a partial monopoly with those inside able to keep others out because they were well placed to spot them (hence the London network of taxi shelters, a taxi recycling centre/dump at the western end of the South Circular Road, and even a trade newspaper, the Globe, with its offices located strategically in the East End).

    However, there had to be a fee for administration, and over time the practice grew up of people leaving the trade recovering some of their costs from the people who could come in when they left, just like sale of offices in an earlier era. Naturally later generations of operators came to think of licences as property, and equally naturally governments forgot why they were doing it in the first place and came to think of licensing as merely about revenue raising – so they charged more for the “free” revenue (not really free, since the economic distortions aren’t counted) and got into lifting with their backs.

    So the current debate is misguided, because (a) it shouldn’t have been allowed to deteriorate into property on the one side and economically distorting revenue raising on the other, and (b) the original purpose has been forgotten. Reform should compensate those who paid fair value for licences (the winners are the earlier generation who got the first buy outs from later comers), but not forget to maintain the original purpose – i.e., not let in “bad bacteria”. Licensing is so successful at its original objective that the possibility of bad bacteria, even their very existence in the past which shows how real that possibility is, has been forgotten.

  12. The taxi license racket has been a gripe of mine for many years. Is there any other industry that enjoys such overt and utterly illogical protection? It’s command economy nonsense at its worst.

    Sorry to say Terje but I prefer Tim’s suggestion. The problem with your idea is that the current inflated prices only came about as a function of expectations of government-protected oligopoly profit in the future. The second the government announces an intention to cut the nominal price down the line I think you’ll find nobody’s willing to fork out 400k for a piece of paper that will soon have no value.

    Better to release more licenses gradually like Tim says and at least give operators the chance to adjust over time. No point in creating needless suffering for those who’ve done nothing more than pursue a business opportunity and take the government at its word.

  13. The second the government announces an intention to cut the nominal price down the line I think you’ll find nobody’s willing to fork out 400k for a piece of paper that will soon have no value.

    So what? If the government is selling licences at $400k then any buyer that wants to enter the market (and clearly such people exist) will be better off paying at $350k on the open market than at $400k from the government even if next year the government will be selling them for $360k. If nobody buys any new licenses from the government then the insiders get one more year to enjoy a sheltered monopoly. However at some point buyers will show up. Certainly at some point before the price hits zero. If it really does take until the price hits zero then the insiders get ten whole years of exclusive business and they can hardly complain.

  14. conrad,

    The nature of subsidies does not make childcare a protected industry. Subsidies lower the barrier to entry, not increase it like licensing does. The nature of subsidy funding is also a more political football than licensing, with continued support tied to the party in power. Taxi licensing is much more part of the established order of things, since licensing does not require yearly budget approval, and subsidies do.

    My point is that those that invest in childcare centres have more risk than taxi drivers from government reform since subsidies require the state to act and licensing requires the state to do nothing to maintain the status quo. Therefore the risk should be built into the returns expected from the investment. Taxi drivers clearly think there is little risk, despite the chatter, and childcare centres do too, now that the Working Family Guy is in the big seat.

    So although I accept your argument that both industries are rent seekers, compensation is a difficult issue, and one that I am rethinking on the taxi industry. It is state interference that has caused the problem of misallocation of resources, but given that many have a stake in the status quo and in order to make reform political palatable. Phased withdraw of taxi licensing and childcare subsidies is one method.

  15. Terje,

    It’s far simpler for the government to simply issue more bits of paper than to wade even further into the market and try to act as a price-maker in an area it has little to no expertise. And if come January 1 the government overprices the new licenses, under your plan Joe Public is forced to cop rent-seeking cabbies for another 12 months.

    Don’t get me wrong, I think both plans would be effective in the long run. It’s just that I reckon Tim’s plan handles the transition period a little better.

  16. How can they “overprice” new license when the price is fixed with an annual step down?

    The problem I have with Tims plan is two fold:-

    1. The date for the final phase out is not defined:-
    2. The price can swing somewhat wildly.

    Both of these leave more scope in my view for political backlash down the track and subsequent retreat. Better to deal with the politics once and then move on.

    However I agree that Tims plan isn’t too bad.

  17. Mark – what will it cost?

    Given that the beneficiaries of reform are taxi users I think they should pay for the reform rather than the general tax payer. So I would suggest that compensation be paid for by a levy on the taxi industry. 😉

    Obviously users pays reform would not be that different to a phase out.

  18. Well, mostly I like my idea because I thought it out myself. All those years of poking round the farm on my motorbike trying to come up with good ways to transition to a less regulated system. I agree there is probably not a lot of difference. I just like the idea of the price being set in a market rather then dictated by fiat. Even if it is a dirty market.

  19. Terje, it is misleading to describe taxi users as “the beneficiaries of reform”. They are the victims of the current state of affairs. Lifting your boot from someone’s neck is not benefiting them.
    By the same logic, you could argue that if amnesty is ever granted to harmless imprisoned drug users they should pay the administrative costs of their release.

  20. Smally – the winking smiley face in my comment was not put there purely by chance.

  21. Here in SA licences sell for $360k when they were $8k back in the early 80s. Investors buy them for capital gain and lease them to the cabbies for about $300/week. Very few drivers actually own their own licence but effectively pay rent to their landlord owner. Now you might say $300/week is not a decent return to the owner but it’s just like real esate rentals. They’re high marginal tax rate taxpayers and are in it for the capital gain. You can of course gear the investment too, just like RE and shares, etc. It’s not just a case of govt economic rents doled out here, it’s also the interaction of the income tax system. The qwuestion you’ve got to ask yourself is- Would the govt charging the extra $300/ week for anyone wanting to drive (assuming they are not rapists and can drive and have a multi language GPS of course)with zero tradeable value, really benefit passengers. Not bloody likely and that’s all you’d get.

  22. ‘qwuestion’… Streuth the pecking skills are getting worse or Elmer Fudd is taking me over…

  23. If you do wish to end the taxi licensing system then buy back the licences held by taxi owners at their market prices. For many owners their life savings are tied up in the licence. A capricious change in government policy would be unfair – it won’t happen either.

    Assignment fees have been declining in recent years and driver salaries are low. Licence values have been rising along with the general rise in economy-wide asset prices.

  24. HC – I agree with your approach to a wind up, however you seem rather non-commital about whether the scheme should be wound up. Do you see any benefit in keeping it going?

    Observa – when you say they are in it for the capital gain are you saying that they expect prices to go even higher?

  25. There is a vast economics literature on the case for deregulating the taxi industry and most of it supports deregulation. But this literature suggests we are starting off from scratch and have to decide between a regulated and an unregulated industry. That isn’t the choice. The relevant choice is to continue with the current system, to expropriate by stealth by gradually increasing taxi licences, to expropriate licenses, or finally to buy them back on terms acceptible to the owners. Of the last three options I prefer the last.

  26. Pingback: To licence or to not licence « Thoughts on Freedom

Comments are closed.