Free Market Taxis Are Possible

In New York City the supply of taxi cabs is set by a government statute limiting the number of licenses and the price of a taxi ride is also set by a government agency. So as Felix Salmon says, if the city increased the supply of cabs there would be more cabs on the street but fares wouldn’t fall. DC has a basically free entry system with regulated prices. The result, relative to NYC, is that it’s easier to get a cab. That’s especially true in more peripheral areas of the city. New York’s combination of price controls and supply limits results in endemic taxi shortages in the outer boroughs.

Salmon further goes on to argue that a genuine two-sided deregulation in which both the quantity of cabs and the price of cab rides is set by the market is totally impractical. “If you deregulated cab fares,” he says “utter chaos would result — New Yorkers would basically have to haggle over the cost of a fare every time they got into a cab.” Consequently “the fare schedule has to be set, in advance, by the municipal government.”

In fact in Stockholm they’ve done what Salmon says can’t be done, and taxis are allowed to charge whatever price they like. The main solution to the problem he identifies is that most cabs are affiliated with one of a few large taxi companies that have posted fare schedules. You no more haggle over fares with Taxi Stockholm or TopCab than you bargain with the guy at the butcher counter of your local supermarket over the price of a steak. The prices are posted and the customers take them or leave them. What this system does do is allow for flexibility and innovation in pricing models. It also does allow at the margin for smaller firms or solo drivers to engage in haggling-based fares. One major consequence of this is to greatly facilitate drivers’ ability to rip off tourists (i.e., me when I was there) since the overall setup is unusual and someone who doesn’t live in the city is facing major information asymmetries. Arguably this constitutes a net policy benefit since it sort of makes sense for cities to find subtle ways to screw over visiting tourists.

Long story short, I’m not sure whether the DC model or the Stockholm model is best, but the New York model is inferior to both of them and the Stockholm model is certainly workable. Once upon a time, I suppose almost all retail transactions were oriented around haggling, but precisely because that’s an annoying way to do business the general evolution over time is to posted prices and the same factors work on an deregulated taxi market.