The problem underlying lousy D.C. cab service is really quite simple: the city forces all cabdrivers -- good and bad -- to charge the same prices.

Imagine what would happen if all the District's restaurants were suddenly subjected to the same regulation -- if Jean-Louis were permitted to charge no more than McDonald's. Service and food quality at Jean-Louis would drop dramatically. Remove incentives and service plunges. This principle also holds for cabs. Why be courteous and keep your cab well-maintained if you won't be rewarded for your effort?

It's true that drivers do receive tips, and so a small link between service and performance exists. But tips make up far too small a portion of drivers' earnings to provide much incentive for good service.

While everyone recognizes that changes are needed to improve the District's cab service, the changes proposed and adopted so far are mostly steps in the wrong direction. Limiting the number of cabs is certainly not the answer, and neither is a flat increase in the fares. Most drivers deserve more, but not all deserve the same amount.

What's needed is dramatic reform. To begin with, the city's archaic zones should be abolished. The arbitrary geographical division of the city needlessly distorts the determination of fares. Meters should be introduced.

But meters are just a start. What's really crucial is a move toward market pricing. Market pricing means letting fares be determined by the interaction of supply and demand, rather than by the whim of the D.C. Cab Commission. This is not so radical as it sounds. The free market works well in most other sectors of our economy, and it can here too.

Under a free-market system, drivers would charge a fixed metered rate per mile and minute, just as they do in other cities. The crucial difference, though, is that each driver would determine his own fixed rate per mile/minute. The need to attract customers would serve as a check on cabdriver greed.

The cab commission could require that rates be posted conspicuously on the outside of cabs; people would then know the expense of the cab they were hailing.

What would a cab system operating under market pricing produce? For one, more cabs. Artificially controlled prices remove much of the incentive to enter the cab business. Open up cab pricing and there would be considerably more drivers vying for the increased dollars. The result: more convenient and better service.

Some drivers, perhaps a good number, would choose to go after the low end of the market, where passengers would prefer to skimp on car condition and driver courteousness in exchange for lower prices. Passengers would get what they pay for.

Even so, all passengers could count on at least the level of service now available -- admittedly not very good -- because the city would still enforce minimum safety and service requirements.

How would those hailing cabs sort out overpriced from fairly priced cabs? By reputation. Cabs with good reputations could charge more than those with bad. And drivers offering good service would seek to distinguish themselves by forming collectives with other drivers offering similar standards and service -- that's how the public could tell the good from the bad.

Quality is predictable under a collective system, whether of cabs or fast-food restaurants, because there exist strong incentives for groups to police the service of the individual members. In a cab collective, the service of one would affect the reputation and thus the business of all. Profit-driven cab collectives are bound to ensure better service than government inspectors.

These reforms would not resolve the District's problem with drivers who are unwilling to go into certain outlying neighborhoods. These drivers must be given some incentive for undertaking additional risk. It's simply unfair and unworkable to demand, as the city does now, that drivers go into Southeast Washington late at night for virtually the same fare as a midday trip to Capitol Hill. Cabdrivers and passengers should be encouraged to negotiate "risk premiums" in amounts determined not by desk-dwelling city officials but by drivers, since they are the ones out on the streets.

The District's cab problems are solvable. All that's needed is a little imagination and a willingness by cab commission members to give up their price-setting power in the interest of passengers and drivers. A departure from the present "command economy" approach would leave everyone better off. -- Ira W. Carnahan