Commentary

Legalize Ridesharing and Remove Onerous Taxi Restrictions

Amidst the evolving tension surrounding the ridesharing industry, some cities are welcoming the free market phenomena of ridesharing while others are yielding to the taxi industry cartel. In the first week of March, California Assembly Member Adrin Nazarian introduced a bill designed to regulate ridesharing in the state. Known as Assembly Bill 24, it demands that ridesharing companies like Uber and Lyft subject their drivers to more comprehensive background checks: the Department of Justice criminal background checks, the submission of fingerprint images, and enrollment in a program that sends a notice to ridesharing firms if a driver gets a DUI. However, Uber and Lyft already have their own system of driver background checks. Therefore, this bill is clearly a response to the unrelenting lobbying efforts of the taxi drivers upset by the termination of their monopoly. It is a protective move which will seek to choke innovation, kill competition and limit consumer choices. Fortunately, the news is not all negative. During the same time period a Texas lawmaker, Chris Paddie, filed a bill that would undo efforts by several cities to regulate these vehicle-for-hire apps.

Uber and Lyft are both pioneers of real-time ride sharing technology that uses smart phone applications to connect drivers to riders. These apps are linked to the GPS system allowing the drivers to determine where the customers are waiting and allowing the customers to input their destinations in advance – eliminating any confusion of location in either case. These apps also provide customers with an option of splitting fares with friends, reducing the hassle of counting change or loaning money. While these perks can explain the rising popularity of these apps, there are deeper reasons why free-market economists hail these innovations.

Uber and Lyft both operate in markets that are as competitive as modern-day markets can get. First, Uber and Lyft drivers do not face barriers to entry, unlike standard taxi drivers who must obtain expensive medallions from taxi companies in order to operate. Second, Uber and Lyft charge a ‘surge price’-a price that is between 50-200% higher during bad weather and congested traffic — in order to allocate scarce resources efficiently and eliminate shortages.

Despite Uber’s drivers making $6 dollars more per hour than the traditional taxi drivers, the fare for Uber is lower than the fare for a taxi. In general, ridesharing apps have resulted in a new revenue stream for Uber and Lyft, more choices for riders.

This exemplifies the efficiency of free and unregulated markets. Furthermore, it injects added competition which should lead to an improvement in the overall quality of ride services and pressure to innovate outdated taxi services.

However, some in society are unwilling to embrace this innovation. Angry taxi company owners and ideological politicians have stepped in to push for the extension of the traditional regulations to the ridesharing services. There are several reasons why this approach is problematic.

First, the ‘safety concerns’ argument against ridesharing is weak, because Uber and Lyft already perform the same type of background checks on drivers’ history as the taxi industry, screening drivers through sex offender registries and criminal databases and rejecting any with DUI records. A recent study by the CATO Institutefound that there is little evidence to suggest that ridesharing is less safe than traditional taxis. In fact, ridesharing may be safer for drivers since transactions are cash free. Second, ridesharing transactions are more symmetrical since fares are transparent and both driver and passenger can look up each other’s background. Third, Uber and Lyft offer 1 million dollars worth of coverage for deaths, injury, and damage from the time a driver accepts a ride to the time a ride is completed. Also, these apps allow customers to rate their drivers and fire anyone who falls below a certain rating. This significantly undermines the “moral hazard” problem – the theory that when losses are insured against, drivers have less incentive to take the precautions to avoid accidents. With ridesharing, drivers have incentives to try to drive as safely as possible to continue enjoying their new stream of profits.

The explosion of ridesharing services implies that customers are unhappy with traditional taxi services. This is not surprising given the nature of the taxi market. Taxi drivers have been shielded from competition, allowing them to offer poor service at inflated prices. As such, what the taxi companies face today is a justified end to the years of unfair monopoly that they have enjoyed.

It is understandable that individual taxi drivers feel threatened by ridesharing companies. After all, the existing regulations are unfair for the taxi drivers who are forced to buy medallions or paint their cars in certain colors. In January, the Portsmouth Taxi Commission demanded the elimination of taxi medallions and other onerous restrictions. The taxi industry should go further by modernizing its services and pushing regulators to remove restrictions throughout the country. The taxi industry can develop its own apps, accept credit card payments and improve service quality. For example, taxi companies in Seattle have started developing and adopting new apps – a result of the City Council legalizing ridesharing services. Other cities should follow Seattle’s lead. Without competition ridesharing could become the same type of monopolistic service as the taxi industry.

The solution is not to ban Uber; Spain, the Netherlands and Nevada have taken this action and Uber faces lawsuits in California and India. These are unfortunate consequences of taxi drivers successfully lobbying for continued protection and respective governments responding to their demands. Hence, if taxi drivers are choking innovation, killing competition and limiting consumer choices, governments should loosen laws to end the taxi industry’s monopolistic practices.

Baruch Feigenbaum is senior managing director of transportation policy at Reason Foundation and lead author of Reason's Annual Highway Report.