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In D.C. Taxi Bribe Case, a Taste of Regulation's Perils

(By Marvin Joseph -- The Washington Post)
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By Samuel R. Staley
Sunday, October 11, 2009

The recent indictments of D.C. Council member Jim Graham's chief of staff and 38 others on bribery charges may be a harbinger of things to come if the council continues to move toward restricting the supply of taxis.

Apparently sensing that the regulatory winds were changing, taxicab operators and company owners allegedly began paying off D.C. officials in 2007 in the hope that they would get favorable treatment once the city started restricting the supply of taxicabs. The federal indictments state that more than $300,000 was passed out to officials with the expectation that cab interests would be protected as tighter regulations took shape.

If true, it would be a surprisingly small investment given the potential financial gains those paying could have reaped. Supply-side limits on cabs create instant paper wealth for existing companies and owners, and generate powerful incentives to engage in bribery or to otherwise capture the regulatory process.

The potential windfall from increased regulation for cab company owners is hard to underestimate. Medallions, the legal permission needed to operate a taxicab in New York, sell for more than $500,000 each because supply is so far below demand. Licenses in smaller cities with taxi caps can sell for tens of thousands of dollars in informal "gray" markets. Economists call these regulation-induced increases in paper wealth "monopoly rents" because they exist solely as a result of government restrictions on the supply of competitors.

Overnight, taxicab companies in large and small cities have become multimillion-dollar enterprises that require large bank accounts and debt beyond the reach of one-car operators or low-income entrepreneurs.

It's no wonder some taxicab interests might seek to bribe elected officials to enact legislation that favors them. Several hundred thousand dollars is a small investment for a return that could reach into the millions. What may be most surprising is that access to some high-level officials allegedly could be bought for paltry investments ($1,500, according to one indictment).

But it's not just overt bribery that undermines the taxi market.

In city after city, the regulatory system has quickly become captured by the strongest players involved: taxicab company owners, who often act as a bloc and work fiercely to protect their interests. Less well-organized and vocal players, notably drivers, single-car operators and taxi users, become marginalized.

Taxi users and outlying neighborhoods inevitably lose in this scenario, too. As the supply of taxis and new competitors is limited, drivers and companies abandon low-margin, low-dollar fares in "thin" markets such as outlying neighborhoods or fares that arise from meeting the day-to-day needs of residents. Instead, they focus on high-margin, high-dollar fares in downtown areas such as K Street or Capitol Hill, near major event locations such as the convention center or the Kennedy Center, or at the airports.

This highly targeted approach becomes an economic necessity as company owners struggle to pay off the high cost of licenses and as drivers have to pay higher leases to cab companies (which must service the debt on the licenses).

Instead of a market dominated by nimble and flexible enterprises, the industry becomes controlled by a few large companies with exceptionally strong incentives to maintain the status quo, whatever the cost and regardless of higher prices and declines in service quality.

Lost in this process is the impossible burden placed on taxi commissions that are tasked with meeting often contradictory objectives. Expanding the scope of regulation creates conflicts that pit consumers (who want abundant service and low fares) against taxi drivers and owners (who want higher fares and limited competition).

The D.C. Taxi Commission would do well to avoid attempts to restrict the supply side of the District's market. District visitors and residents value the efficiency and benefits of having 8,000 cabs, and they want more service, not less. Competition and openness in the market create incentives for cab companies and their drivers to meet these needs and preferences. A far more productive approach would be for the commission to focus on ensuring that users get the highest quality and most reliable taxi service possible.

The writer is the director of urban and land-use policy at the Reason Foundation.

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