A nice little article courtesy of our old mate Captain Cab. 15 years old, but it sounds like Edinburgh today, if for limos you read PH, and % you read £
TAXI DEREGULATION? MAKE HASTE SLOWLY
Last spring, a licence to operate a taxicab in the City of London sold for approximately $40,000. The person who paid $40,000 received no physical assets (other than a small metal plate); the buyer also received no good will or brand name loyalty, since those values are associated with the dispatching firms and not with individual licence owners. The only thing the person paying $40,000 received was the right to operate a taxicab in London — a right to spend money now with the hope of receiving even more money in the future.
For outsiders, it must seem a little puzzling that rational individuals would pay so much simply for the right to do business. And it must seem even more puzzling when it is pointed out that 12 years ago these same licences were being bought and sold for about $1,500. The only reason intelligent businesspersons would pay so much is that they expect to earn considerably more with the licence than can their counterparts in cities that do not have such stringent licensing procedures as London's.
How much more the owners of taxicab licences earn because of our restrictive licensing by-laws is not very difficult to estimate. $40,000 invested at a rate of only 12% per year would yield a return of $4,800 per year. The owners of the taxicab licences, on average, could expect to earn about $4,800 more per year in London under our restrictive by-laws than they would earn in other comparable jurisdictions without such restrictive conditions on entering the industry. That's $4,800 each. Per year.
It is little wonder that a local sports writer held onto his licence long after he ceased being a regular taxi driver. He could lease the licence to some other driver for about $400 per month and laugh all the way to the bank. And drivers are willing to pay up to $400 per month to lease a licence because they expect to earn that much more each month.
The main reason that taxi owners expect to earn at least $400 more each month is that our current by-law severely limits the number of cabs. This limitation means that even during slack periods, drivers can keep fairly busy and keep making money. And during peak demand periods, they do especially well, never having to wait between customers. Unfortunately customers often must wait as long as an hour or more to get a cab during these periods.
In cities that have less restrictive by-laws, there are more cabs available and so they have more idle time during the off-peak periods. As a result the licences to operate a taxicab have a much lower resale value. At the same time, though, the larger number of cabs means that customers have shorter average waits during peak-demand periods and are served better.
Because customers in London are understandably dismayed at long waiting periods, and because there is money to be made, several companies have begun offering executive car limousine services. These services provide a substitute for taxicabs that is usually more luxurious and often not much higher-priced. Not surprisingly, the owners of taxi licences are seeing their business erode as limos expand to offer their services to London's citizens. And not surprisingly, the taxi owners have been lobbying long and hard to have city council stop the limos from providing such serious competition.
If the limos are successful in fighting off this anti-competitive move from the taxicab owners, the value of the taxi licences will undoubtedly decline. Indications are that licence prices have already dropped from highs near $45,000 to perhaps as low as $30,000 in recent weeks. For someone who owns, say, 75 licences, this decline in licence value represents a loss in net worth of over a million dollars! It is not surprising that those few who own a large number of licences are particularly active in trying to block the executive limousine services from competing with taxicabs.
The executive limousine services are obviously providing a service that Londoners want and are willing to pay for. They should be allowed and even encouraged to continue operating as they have been during the past year. If city councillors are concerned about possible confusion between the limos and taxis, banning or severely restricting their service is not the answer. They should simply require that the limos use the word "limo" or "limousine" on their top lights, their ads, and their private telephone lines.
At the same time, full-scale deregulation of the taxi industry may be injudicious. Many owners of single taxi licences have invested considerable savings in their licences; others have (perhaps unwisely) counted on them as retirement nest eggs. Destroying these values over night would be viewed by many as unfair; however, letting them erode gradually in the face of new forms of competition is a reasonable strategy for the city to follow. At the same time, Londoners will get increasingly better service.
Dr. Palmer is an Associate Professor of Economics at The University of Western Ontario. He began studying the taxicab industry in many different cities in 1978. He is presently a citizens' representative on the taxi liaison subcommitte.
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