by PA Pautler · Cited by 8 — tions behind taxi regulation and a brief history of taxi regula- tion. Section V analyzes the economic effects of taxi regula- t ions on the structure of
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FEDERAL TRADE COMMISSIONJAMES C. MILLER III, ChairmanMICHAEL PERTSCHUK, CommissionerPATRICIA P. BAILEY, CommissionerGEORGE W. DOUGLAS, Commiss ionerTERRY CALVANI, CommissionerBUREAU OF ECONOMICSWENDY L. GRAMM, DirectorRONALD S. BOND, Deputy Director for Operations and ResearchDAVID T. SCHEFFMAN, Deputy Director for CompetitionJOHN L. PETERMAN, Associate Director for Special ProjectsRICHARD HIGGINS, Deputy Directory for Consumer Protect ionJOHN E. CALFEE, Special Assistant to the DirectorROBERT ZWIRB, Special Assistant to the DirectorJAMES A. HURDLE, Special Assistant to the DirectorTHOMAS WALTON, Special Assistant to the DirectorKEITH B. ANDERSON, Assistant Director for Regulatory AnalysisPAUL RUBIN, Assistant Director for Consumer Protect ionROBERT BROGAN, Assistant Director for Competition AnalysisPAULINE IPPOLITO, Assistant Director for Industry AnalysisJAMES M. FERGUSON, Assistant Director for AntitrustThis Report has been prepared bythe Federal Trade Commi ss ion. I t hasdoes it necessarily reflect the viewsof its members.the Bureau of Economics ofnot been reviewed by, norof, the Commi ss ion or any-i i-
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ACKNOWLEDGEMENTSThe authors would like to thank the many members of theBureaus of Economics and Competition who reviewed various draftsof this report and who provided valuable assistance during thetime this report was prepared.In particular, we would like toacknowledge the assistance of Denis Breen, Robert Lande, WilliamMacLeod, Jerry Philpott, and David Scheffman in reviewing themanuscr ipt.In addition, we would thank Edward Gallick, whoseown work on taxicab regulation stimulated our thinking on thesubject.Finally, we would like to thank Pamela Armiger and PaulAbraham, who typed several of the drafts, and the Bureau ofEconomics Word Processing staff, who prepared the final version.-i i i-
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II.III .IV.CONTENTSIntroductionPolicyConclusions.and Arguments for RegulationCosts of Regulation.Experiences with Regulatory Reform.Outline of Report.. . .SA..TheTaxicab.. Industry .The Role of the Taxi.Market Segments.1. Cruising’Cabs..2. Taxicab Stands..3.. Radio-Dispatched Cabs4. Contract Services5. Relative Sizes of SegmentsFirm Organi zat ion. . . . . . . . . . . . .Forms of Regulation.1. Entry Regulation..2. Fare Regulation.. .3.. Service Restrictions4. Service Requirements.Quality Regulation . .. . . .TheoreticalTaxicabMode 1Market.. . . . . . . . . . . . . .RationalesforRegulation Potent ial Sources of Market Fai lure. . . . . . . . . . .1. Congestion and Pollution Externalities.a. Congestion. . ..b. Air Pollution.Overpricing of Public Transit. Indeterminacy of Cruising Equilibrium..Impediments to Price Compet it ion. . . . .a. Cruising Cabs.b. Taxi StandsBargaining over Price.. . .. . . .. .. . Economies of Scale. .Informational Problems..Waiting Time Externalities .Inefficiently High Taxi Fares.a. An Extreme Example: An Airport.b. Another Example: Air 1 i ne Regu lat ion.c. Radio-Dispatch and Cruising Segments. .. -iv-Page
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10. Mispricing of Taxi Trips.11. Enforcement of Taxi Regulations..12. Conclusion. Regulation in Practice..1. Motivations for Regulationa. Protection of Public Transit and Taxis.b. Promotion of City Image..Self-Interest of Regulators.Quality of Taxi ServiceOther Suggested Justifications forRegulation. .History of Taxi Regulation .. .. . .. EconomicRegulation. EffectsEffectsI ndustri al Structure.. .. .. .. .. .. .. .. ..Franch ises.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . .. .. .. .. .. .. .. .. .. .. .. .. ..2. Numerical Restrictions on Taxicabs3. Allocation of New4. Firm Size and Service Requirements.Effects on Industry Performance..1. Fare Level..2. Number of Cab Hours of Service..3. Waiting Time.4. Number of Trips. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .5. Quality of Service.6. Cost of Producing Cab Service.7. Allocation of Cabs..8. Types of Service9. Effects on Other MarketsEffects on Efficiency of Resource Allocation.Effects on the Distribution of Well-Being.1. Los e- 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .a. Consumers. . . . . . . . . . . .. . . . . . . . IO.. . .. .. . . .b.. Workers. . . . IO” .. . . . IO. . IO.. . . . . . . . IO.. . .. . .. .c. Ta.xpayers. .. . .. . .. .. . .. . .. . .. .Gainers. . .. .. . . . . .. . .. .. . . . . .. . .. . . . . .. . . . .Licenses.. . . . . . . .. . . .. .. .. .. Inf erences Prices. from MedallionReform. . . .VI.Regulatory.. . .. .Motivations for Regulatory Reform..Effects of Regulatory Reform.1. Radio-Dispatched Market SegmentIndustrial Structure.Fare Level..Number of Cab Hours of Service.Waiting. Time. .. ..Page101101101104105105105112112113114115115116117
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Number of Trips..Quality of Service..Cost of Administering Cab Regulations.Alloea t ion of Cabs..Types of Service.k. General Reactions to Regulatory ReformAirport Servi ce. . . . . . . . . . . . . . . . . . . . . . . . .Additional ConsiderationsCase Studies of Regulatory Reform.a. Seattle. . . . . . . . . . . . . . . . . . . . . . . . . . . . .b. San DiegoConges t ion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Oakland and BerkeleyPhoenix and Tucson..Other Experiences with Regulatory Reform.1. Atlanta. ..Indianapolis.. .Port land. . . . . . . . . . . Pres no. . . . . . . . . . . . .Spokane. .. . . . . . . . . . . . .Sacramento. Charlotte.. . ..VII.Conclusion. Appendix A.Appendix B. .. .. Elaborationthe Theoretical Model.. ..Empirical Estimates of the Demand forTaxi Service..The Demand for Taxi Rides. . . . . . . . . . . . .a. Fare Elasticity. .– Waiting-Time Elasticity.c. Income Elasticity.Substitution Between Taxis and Other Services.The Value of Waiting TimeBibliography. . .. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi-Page118118119120121121121123124125125132136141144144146148150151152153155157162162162165165166167169
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INTRODUCTION AND POLICY CONCLUSIONSThe taxicab industry is heavily regulated, mainly by localgovernments.Entry, fares, services, and qual i ty are restr ictedin a substantial majority of large urban areas.However, anumber of cities have recently deregulated entry, fares, and someaspects of service.This report provides an economic analysis ofthese taxicab regu lat ions and experiences wi th regulatory reform.The principal conclusion of this report is that no persua-sive economic rationaleis avai lable for some of the mostimportant regulations.Restrictions on the total number of firmsand vehicles and on minimum fares waste resources and impose adisproport ionate burden on low income people.A number of citieshave achieved favorable results by deregulating entry and minimumfares in the radio-dispatched market segment, which typicallyaccounts for around 75 percent of all cab trips.Similarly,there is no economic justification for regulations that restrictshared-ride, dial-ride, and jitney service.By contrast, potential market failures provide a credibletheoret ical rationale for some other types of regulat ions,including fare ceilings and regulations dealing with vehiclesafety and liability insurance.Most of the problems cities haveexperienced with taxicab regulatory reform can be traced to highfares at airport cab stands.There are several ways to deal withthese problems,including revisions in the first-in-first-outqueue system,improvements in fare posting requirements,increased cab line user fees, or lower fare ceilings.
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Finally, some regulations might conceivably be justified oneff iciency grounds because of distortions created by other taxiregulations.Fare regulations that underprice certain categoriesof trips might provide a “second best” rationale for prohibitionson service refusal,requirements to offer service at certaintimes or places, or mi nimum leve is on the numbers of cabsoperated by firms.However,surcharges for unprof i table serviceswould be more efficient than such service requirements.Arguments for RegulationIn analyzing taxicab regulations,it is useful to considerfour taxicab market segments and five areas of regulation,because the mer i ts of regu lat ion differ substant ially among them.The four segments are cruising cabs,cabs that wai t at stands,radio-dispatched cabs, and cabs that provide service undercontract.The five areas of regulation are:entry restri ct ions;f are controls: restri ct ions on the types of service offered, suchas ride sharing: requirements to provide certain amounts ofservice; and quality regulations, which concern vehicle safety,driver qualifications,and liability insurance coverage.Arguments for taxicab regulation are based principally onalleged market imperfections that might lead to market failure orinefficient resource allocation in one or more of the varioustaxi market segments.The resource misallocations involveover- or under-production of various taxicab services, productionof service at too iowa quality level, or unnecessarily highcosts of producing a given output.-2-
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Ten potential sources of market failure are discussed andevaluated in the report.Three suggest that in unregulatedmarkets taxi fares might be above the efficient level.First,some market segments the transactions costs to riders of findingthe cab with the lowest fare is high.This impediment to pricecompetition may cause fares to be inefficiently high in the caseof cruising cabs and cabs using stands at airports.Second,drivers of cruising cabs may be in a position to pricediscriminate and extract unreasonably high fares from riders whoface a high cost of finding another cab or from out-of-townvis i tors.Third, economies of scale might pose a barrier toentry that would permit taxi firms to charge inefficiently highfares for radio-dispatch and contract service.Since one or moreof these arguments appl ies to each of the four market segments,one cannot reject the possibility that fare ceilings may increaseeff iciency.A fourth potential market imperfection arises in the cruis-ing cab segment.Economists have not developed a model of thecruising cab segment that determines a unique equilibrium fareand service combi nation.It remains a theoretical possibilitythat the fare that would be established in an unregulatedcruising cab market segment could be above or below the efficientlevel and that regulation of fares could increase efficiency.1 If fares arecompetition mayregulations.regulated, similar impediments to qualityprovide a rationale for minimum quality
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This argument provides the only potential rationale for fareregulations that go beyond fare ceilings to restrict farecompet i t ion.However, we conclude that impediments to pricecompetition in the cruising cab market eliminate the possibilityof fares below the efficient level.Fare regulations themselves are a fifth potential marketimperfection.If fares are regulated, some categories of tripsmay be priced so low that they would involve losses for taxifirms.Firms might then refuse service even though most ridersmight be willing to pay enough to make the service profitable.This provides a possible second best rationale for a prohibitionagainst service refusal and for requirements to provide serviceat certain places or times.Furthermore, because it may beprohibitively costly to enforce requirements for serviceprovision when thereopen entry for independent cabs,theremay be a second best argument for imposing a minimum level on thenumber of cabs operated by a firm.However,it woulrJ be moreeff icient to allow surcharges for the unprof i table servi ces.A sixth potential marketimperfect ion,informational prob-lems, provides a rationale for quality regulations.Because itmay be difficult or. impossible for riders to judge some aspectsof the quality of cab service, e.g., vehicle safety or liabilityinsurance coverage,it may be eff icient for governments toregulate these matters.-4-
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