Taxis, Supply Management and Speculation

In response to my recent post, Taxis and Picket Lines, commenter Peter notes:

The same thing can be said for any government quota system. Ottawa Taxis and Ontario milk come to mind. While not really defending the quota system, it does afford some reliability in supply. It also gives workers a chance to find jobs with some chance of a retirement plan at the end. There have been many suggestions about how to change the system, particularly in Ottawa, there is some jurisprudence in this regard dating back to the 1980s, I believe. I am not really offering much here. The taking away of long established government rights seems to be always met with arguments of financial hardship should those rights be revoked. Buying back the licenses or quota from every taxi driver or milk farmer maybe one way to do it but how much are we willing to pay as a city or province to do this.

Peter is correct that the taxi quota system is similar to other supply management programs, and he is correct that the intent of Ottawa’s taxi service is to provide some reliability in supply. The current system reliably limits the supply of taxis. Were it not for the plate system, we would see more cabs on the roads, and customers would have less difficulty hailing a cab. The plate system is a giant give-away to the entrenched interests of the taxi industry, and the extract rents from customers and new entrants to the market. It is a rather sick operation that a relative few people can hold the market hostage until their ransom is paid.

Peter is also correct to note that a shift away from supply management could cause a lot of financial upheaval for those who currently own or rent plates. However, I think Peter overstates the financial implications especially in regards to public funds.

The city, the legal regulator, has complete authority to regulate the market as it sees fit (barring any conflict with provincial or federal laws). The city owes no duty to Big Taxi to maintain the status quo. If the city were to simply open the market to any compliant service provider, the financial hardship would fall solely on the shoulders of the existing cabbies and cab companies.

Of course, this wouldn’t be an optimal situation. It would also be a little shady on the part of the city. Companies and residents have made financial decisions and investments based on the current system, and they might not be able to quickly pivot in response to eliminating the quota system.

But we have to remember that the purchasing or renting of plates was never “final sale”; it was a speculative move—essentially a guess. Speculative business deals are made frequently and businesspeople are expected to bear the risks of those deals. The only difference in this situation is that the risk-takers were relying on the government to keep their word. Or, at least, that’s how it might seem.

The taxi industry spends a lot of money during municipal campaigns and, more generally, on municipal politics. This is a calculated investment in attempt to maintain their privileged status. It is also demonstrative of the industry’s understanding that this system is not set in stone. It always potentially fluid.

When speculating, the risks—inlcuding the potential for regulatory interference/clearance—must be taken into account. The risk that your protected economic status can change on the whim of a few politicians should be reflected in the price you are willing to pay to get in on the market. If a market participant doesn’t take that into account, that is what we call a bad business decision. The city is, generally, not concerned about stopping private actors from making bad decisions.

Further, there is no reason to assume immediate economic turmoil. Regulations cannot be changed overnight, and we can’t assume that removal of supply management will result in a free-for-all. The city can, and should, open the market while maintaining regulations over taxi drivers and companies. It will take new competitors time–months or, more likely, years–to enter the market. During that time, the legacy plateholders will be able to continue extracting rents from plate ownership.

Even once we see new entrants to the market, the existing cab companies will still have a major advantage over their new competitors. They will have the staff, the vehicles, the infrastructure, the market knowledge and the brand recognition to dominate the marketplace for some time.

Basically, they have a head start. It is difficult to feel sympathy a lot of sympathy.

Still, individual drivers will be exposed with such a change, which perhaps means the city should act with caution, moving, incrementally, away from the quota system. If the city were to announce that they would be eliminating quotas over the next two years, current market participants would have time to adjust, re-assess their business plans and make themselves as competitive as possible.

And you and me? We’d be able to catch a cab.

One thought on “Taxis, Supply Management and Speculation

  1. Pingback: The Tyranny of Taxis | Steps from the Canal

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