Uber’s $6 billion flag fall

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Leith has covered in detail Uber’s assault on the Australian taxi industry. In every State the taxi industry has been repeatedly flagged as in dire need of substantial reform, particularly its monopoly on licensing. These attempted reforms have never been particularly successful, which I would argue is entirely due to political connections of taxi licence owners, though public pressure is building.

In other jurisdictions Uber has resorted to conducting their business like everyone else – through lobbying and political efforts. I hope that with the general public being made aware of alternatives that this will provide the necessary political impetus to make tough decisions that will cost many of their loyal donors, and often friends, a lot of money, but will make the average citizen far better off, potentially including taxi drivers themselves.

Here’s what’s at stake in the eastern States.

Victoria
Total number of taxi licences – 5,214
Average value of licence – $273,000
Total value of Victorian taxi monopoly – $1.4billion

Queensland 
Total number of taxi licences – 3,300
Total owners – 2,800
Average value of licence – $420,000
Total value of Queensland taxi monopoly – $1.4billion
Taxi subsidy scheme – $15million pa

New South Wales
Total number of taxi licences – 5,647
Average value of licence – $220,000
Total value of NSW taxi monopoly – ~$1.3billion

Here’s a taste of how this $6billion monopoly is sustained.

Taxi industry political donations (via LobbyLens, mostly NSW)
Paid to both sides of politics – $330,068

Taxi industry lobbying
The NSW Taxi Council, and Taxi Industry Association are clients of the very influential Australian Public Affairs business run by these people.

No doubt other States have similar entrenched and politically-connected taxi monopolies. South Australia, for example, has even fewer licences per capita.

I hope Uber and other new ‘ride-sharing’ (well, they are taxis really aren’t they) businesses can be the catalyst for the desperately needed radical reform to taxi licensing and regulation in Australia. The only barrier to this change is the same as always; the political alliances of a small group of current licence holders who have over $6billion of assets at stake.

Comments

  1. Stephen Morris

    At the risk of being burned at the stake, I would like to play Devil’s Advocate here and point out that there is another side to this story, another side which touches on the “initial-state” problem raised in Catherine Cashmore’s “democracy” article last week.

    Let us agree that the restriction of licences causes deadweight losses (though over-pricing and under-supply) and that its removal is something of “value”.

    (For those who hold that cardinal “value” is a theological concept, the issue could be re-stated in terms of metastability: the current distribution of rights is metastable and in the absence of transaction cost barriers and the anti-catalytic effects of Prisoners’ Dilemma, negotiations would proceed to move it to a pareto-preferred position.)

    The more stable equilibrium is one in which supply was not limited.

    However, this does not answer the question: who is to benefit from that change? Or – to put it another way – to whom are the rights allocated in the initial-state? Licence-owners? The travelling public? The State Treasury? Who?

    For example, it is possible in principle to eliminate the taxi monopoly by paying out $6 billion to the licence holders to cancel their licences. The public (or the state) bear the cost.

    Or it is possible to eliminate the monopoly by simply cancelling the licences without compensation. The licence holders bear the cost.

    Coasians will immediately identify this as the same issue which arose in The Problem of Social Cost.

    Are farmers entitled to grow corn near the tracks without the risk of fire? Or are railway owners entitled to run locomotives without having to pay for spark catchers on their funnels?

    Is Dr Sturges entitled to practice auscultation in his consulting room? Or is Mr Bridgman entitled to make confectionary using noisy mortars and pestles next door?

    Is Mr Lefever’s entitled to stack timber on his roof? Or is Mr Bryant entitled to have a smoke-free room without having to pay for a new chimney?

    As Coase tells us, if a) the initial-state distribution of rights is well-defined, b) there is benefit in re-arranging the distribution of rights, and c) there is no transaction cost barrier to prevent that re-arrangement, then it ought to proceed irrespective of how one initially assigns the rights.

    But that in itself doesn’t tell us how the rights are assigned initially!

    The real issue here is not the that there is a problem with taxi monopolies. The real issue here is an initial-state ambiguity concerning who is entitled to the initial-state rights.

    Solipsistically narrow-minded people (and that – in practice – means most human beings) typically assume that the “correct” initial-state distribution is the one they themselves prefer. We see that line of thinking in articles on “democracy” where the writer proceeds to define “democracy” as being the sorts of things he or she likes.

    However, for those who can see both sides of an argument the “truth” is not so self-evident.

    In the taxi industry many licence holders are individuals or families who have invested their life savings on an implicit understanding that this was public policy. The licence regime was certainly legislated, even if the precise number of licences was not.

    It is worth remembering that many of these people have not actually benefited from the licence monopoly themselves. They have bought their part of the monopoly at full price from a previous owner.

    The initial rent-seekers have long since cashed out and will bear no pain from restructuring the monopoly they helped to create. One could simply bankrupt the current licensees. The pain will be borne – at least in part – by secondary market buyers who have gained little and who may lose everything.

    But it is not self-evident that that is the “correct” course of action. It is not self-evident that the initial-state distribution entitles them to nothing.

    How does one determine initial states? As explained last week, that is ultimately the result of aggregating preferences using a device which was itself chosen using a non-privileged aggregation of preferences regarding devices. Such a solution might even be described as “democratic”.

    Had such a democratic system existed in the first place, the early lobbyists might not have been able to bend corrupt politicians to their will, and the current mess might not have come into being.

    – – – –

    p.s. I do not own a taxi licence, and I currently know no-one who does.

    • Commenter2095

      A restricted supply of licenses was not the initial state, and the government has intervened to create an artificial limitation of supply (by prosecuting people who supply the service without a license). The only social benefit being the supposed regulation of the industry.

      Further, I’m not sure that trying to hold some abstract initial state as the ideal is helpful. Surely we should look at which state gives the best social outcomes, what it costs to get there, and what it costs to maintain that state.

      Secondary buyers who would be adversely affected by a large increase in supply made a bad investment decision. If that would bankrupt them, they made a bad investment decision and didn’t sufficiently diversify. We should not make decisions to prop up people who made bad investment decisions. We generally don’t, unless you are “too big to fail”.

      • Stephen Morris

        As foreshadowed in paragraph 15 above, this response is simply a statement of individual preference of what the initial state ought to be (supported by some is-ought fallacies).

        Other people might argue just as convincingly that if the State maintains a licensing regime for decades on end, and allows initial rent-seekers to cash out to secondary market buyers relying on the State’s implicit support for that regime over a period of decades – generations even – then those secondary market buyers ought not to bear the losses from a change in policy.

        Notwithstanding the common tendency of human beings to try to “prove” their preferences (typically using is-ought fallacies), these things still remain matters of preference. An insistence that one preference is self-evidently “correct” and that conflicting preferences are self-evidently “incorrect” is ultimately just solipsistic narrow-mindedness.

        Such preferences need to be aggregated. It is the problem of aggregation that brings us back to the real issue of “democracy” discussed last week: the selection of aggregation devices in the absence of a priori privileged preferences concerning aggregation devices.

        It is quite plausible that people voting on this matter would not prefer to see the losses borne by secondary maket buyers. It is quite plausible that they would regard that outcome as unfair.

      • Commenter2095

        I’m not here to argue that other viewpoints don’t exist, nor that they are inevitably invalid, I’m just trying to argue my own viewpoint. Generally, when a point of policy needs to be decided, people put forward arguments for a position. People may provide counter arguments, which may themselves be counter-argued. It’s quite a useful practice. It helps to inform the preferences you talk about aggregating.

        You can argue that the initial state is unknowable, but I fail to see how that helps us arrive at a good taxi licensing policy.

      • Stephen Morris

        What makes this issue unusual is that there seems to be widespread agreement about the evils of taxi monopolies.

        In fact people have been actively debating it in Australia at least since the Greiner government’s Commission of Audit in 1988. Milton Friedman was railing against it for decades before that.

        And yet nothing happens.

        It just so happens that this is a particuarly good example of metastable rights. On the face of it, the problem could have been negotiated away years ago. It would have been a simple matter simply to buy out the licencees (allocating all benefit to the licence-holders). Or simply to abolish the licensing system (allocating all benefit to the travelling public).

        And yet for decades it hasn’t happened.

        That is due largely to the fact that – rather than recognising the real issue here (ambiguity in the initial-state allocation of rights) – the various interested parties have insisted that their own position is the one-and-only “correct” one and the other side should bear all the costs.

        Had there been fewer barriers to negotiation – perhaps with a more flexible democratic system of government, less susceptible to the pernicious effects of corrupt political agents – the issue would have been negotiated away.

        That is why it is relevant.

    • migtronixMEMBER

      Initial-state does not have to impinged for competition in new form to unseat the monopoly. You speak of the cost of rentable plates as if that’s all one needs to operate a taxi business, its not, and technology has caught up to the point where a peer-to-peer app can connect drivers to consumers by-passing all the perceived value of holding a taxi licence.
      It’s actual direct participatory democracy if you will, and you want to keep the peoples will subordinate to initial-state prevarications?

      • Stephen Morris

        I’ve been locked out again. I wrote a long answer to this but the system wouldn’t let me post it.

        So I’ll try just the first paragraph:

        . . . you want to keep the peoples will subordinate to initial-state prevarications?

        I haven’t stated any preference on this matter, nor may any preference be inferred.

        I was simply using it as a good example of how Coasian Symmetry may be expanded from externalities (its original application) to such things as “rent”, and why the definition of rent actually depends on subjective preferences regarding the “correct” initial-states.

        [There was more but I can’t post it.]