Taxi deregulation would be good for passengers and drivers

For nearly 60 years, the number of taxis in Quebec has failed to keep pace with growth in population and income. In 1952, there were 4,978 taxis on the island of Montreal. Today, regulations limit the number to 4,445. Because of this scarcity, obtaining a taxi owner’s permit in Montreal and Laval now costs more than $200,000.

Limits on the number of taxi permits were instituted during the Second World War. In 1973, the Quebec government took over management of the taxi industry from cities. At that time taxi drivers who had permits issued by municipal authorities received owner’s permits at no charge. From 1985 to 1990, the Quebec Department of Transport instituted a plan to buy back 1,287 permits in Montreal, and remove them from circulation.

Today, getting a permit generally requires buying one from someone who decides to leave the industry. In 2009, there were a total of 8,254 taxis operating in Quebec. The very few new permits added since November 2000 (some 200 for the entire province) are valid for a maximum of five years and are non-transferable.

Supply management policies, aimed at limiting the production of goods or services so as to inflate their prices, are familiar in Canada, due in particular to the marketing board system in use for milk, chickens and eggs, mainly. It is less well known, however, that the taxi industry is regulated in the same way, with similar consequences for consumers. Restricting the number of taxi owner permits, as is currently done in Quebec, usually results in higher fares and longer waiting times for consumers.

Supply management of taxi permits does not necessarily serve drivers any better than it serves consumers. A new owner has to fork out more than $200,000 for a permit, in addition to other regulation-related expenses and, of course, the purchase of a car. This probably puts him heavily into debt, with thousands of dollars a year in interest payments. The new owner must therefore assume a significant fixed cost due to regulation, and this absorbs much of his income. He ends up barely making ends meet: The high income resulting from regulated fares and abundant clients is offset by high costs.

The people who benefit the most from this system are owners who got into the market early. They did not have to pay large sums for their permits, but they still benefit from inflated fares and reduced competition.

Just as Australia and New Zealand eliminated supply management in agriculture, a number of U.S. cities (among them Kansas City, Milwaukee, Phoenix, Raleigh, and San Diego) as well as some countries (including Ireland, New Zealand and Sweden) have eliminated supply management in the taxi sector.

Ireland completely eliminated restrictions on the number of taxis 10 years ago. Waiting times fell dramatically. In Dublin, the proportion of customers who waited less than 10 minutes to get a cab rose from 58 per cent in 1997 to 81 per cent in 2008. New Zealand reformed its taxi industry in the late 1980s and made price determination flexible. Price declines ranging from 15 per cent to 25 per cent in constant dollars were subsequently observed in the country’s larger cities.

Such deregulation benefits consumers and people wishing to join the industry, without jeopardizing regulations governing service quality (periodic vehicle inspections, permits proving a driver’s competence or absence of a criminal record, etc.). Furthermore, to mitigate the effects of deregulation (elimination of taxi owner’s permits and greater flexibility in fares), drivers who paid high prices for their permits could be compensated. This is how the Australian government proceeded when it eliminated milk production quotas.

Foreign experience has shown it is not only possible but desirable to deregulate the taxi sector. All that is needed is a little political courage to make it happen here, too.

Germain Belzile is Director of Research at the Montreal Economic Institute. Vincent Geloso is Associate Researcher.

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