Washington's 8,800 licensed taxicab drivers--already facing the stiffest competition and collecting the lowest fares of any major U.S. city--will lose substantial income if they are prevented from picking up multiple fares without passengers' permission, taxi industry spokesmen contended yesterday.

In addition, the spokesmen told the D.C. Public Service Commission, outlying neighborhoods could receive poorer service--especially in Northeast and Southeast--if the PSC insists on implementing its proposal to give passengers the right to order drivers not to pick up additional riders.

Cab drivers and their spokesmen spent nearly three hours yesterday trying to convince the three-member commission that Washington's zoned fare system, unique among large cities, deprives drivers of income they would receive with a metered fare system.

The only way to make up for that loss, they contended, aside from raising rates, is to continue to allow cab-sharing.

"We need to bring this business into the 20th century," said Daniel Smith, president of Eastern Taxicab, Imperial Taxicab and Dial-a-Cab, which provides radio-dispatching and other services for 950 drivers.

Smith, who said he started driving cabs here in 1940, said following his testimony that 1983 is "the worst year ever" for the industry because of the recent recession and the rising cost of fuel, maintenance, repairs and insurance. He estimated these items have increased 30 to 40 percent since the last taxi rate hike in 1981.

"People are driving 12, 16, 17 hours a day just to survive," he said, "That's working two days a day, just to get by."

The PSC on June 1 lifted a rule adopted during the gasoline shortage of 1973 that allowed drivers to pick up additional fares without consulting passengers.

After an outcry from the taxi industry and city officials, the commission agreed to postpone the action and conduct a public hearing. A decision is expected later this fall.

PSC members said they proposed the change because of passenger complaints, but drivers said the number of complaints is few.

Brian Lederer, the D.C. People's Counsel, defended the current system, in which drivers are allowed to pick up additional fares as long as they don't take the original passenger more than five blocks out of the way. Cab-sharing, he said, increases drivers' income and enhances a rider's chance of getting picked up by a cab.

Lederer suggested that if an original passenger demands that a driver pick up no additional fares, that passenger should have to pay a surcharge of perhaps 75 cents above the fare.

Some cabbies depend on cab-sharing for up to 25 percent of their income and may be forced to quit without it, several said yesterday.

If the new rule stands, said cabbie Kenneth Rothschild, "Then people traveling to the perimeters of the city could have trouble getting rides, because drivers will calculate they will not be able to get a second fare along the way."

"You are going to have more screening of passengers to ask where they are going and whether they will share," he said. Such screening is against regulations of the PSC, but is likely to occur anyway, drivers said.

"Giving passengers a veto will leave other people out in the cold or out in the rain," said Irving Schlaifer, who defended the current system.

"Leave it alone," he urged the three commissioners, "It works."