Michael Farren is a research fellow with the Mercatus Center at George Mason University and coauthor of the study “Rethinking Taxi Regulations.” Anne Philpot is a research assistant at the Mercatus Center at George Mason University.
The D.C. Department of For-Hire Vehicles recently issued emergency revisions to the city’s taxi regulations, which it calls “the first of several major reforms” over the coming months. These changes attempt to save taxis from a trap of their own creation: Regulations that have historically protected taxis from new competition now prevent them from effectively competing with ride-hailing companies such as Uber and Lyft.
The purpose of the emergency regulations — to promote competition and innovation by eliminating regulatory barriers — corresponds with previous recommendations in a study of the D.C. taxi industry published by the Mercatus Center at George Mason University. Our research suggests that the key justifications for taxi regulation have been solved by modern communication innovations, including smartphone apps. As a result, there is little rationale left for taxi-specific regulation.
The DFHV estimates that taxi ridership declined by 13 percent last year, and that may be only the tip of the iceberg. Since the introduction of ride-hailing apps, taxi ridership dropped by 23 percent in Chicago, 30 percent in Los Angeles and 40 percent in Philadelphia.
Reflecting the shift from taxicabs, this past summer the D.C. Council passed legislation to reinvent the D.C. Taxicab Commission as the “Department of For-Hire Vehicles.” The transition to the DFHV is an opportunity to begin with a clean slate and implement the right taxi regulations going forward, rather than hanging on to archaic holdovers from the past.
Obsolete taxi regulations include high licensing fees and equipment mandates, and they micromanage specific business practices rather than simply holding companies accountable for public safety. These rules increase the difficulty of starting businesses, creating what economists call “barriers to entry.” The resulting protection from competition gives established companies a measure of monopoly power. Monopoly power generally causes prices to rise and service quality and quantity to fall because there are fewer consequences for bad service.
Past regulators tried to alleviate these problems with price controls on taxi fares and mandated business practices, but doing so only further entrenched the status quo.
Conversely, nothing incentivizes good customer service like the threat of competition. Evidence from New York and Chicago suggests that the introduction of ride-hailing technology has pushed taxi drivers to improve quality — or at least give riders less to complain about. Competition also inspires the kind of innovation that leads entrepreneurs to focus on niche markets, such as providing service to the elderly, people with disabilities and those in low-income areas.
In fact, ride-hailing apps have become popular because the service is aimed at pleasing customers. Other Mercatus research by Adam Thierer and Christopher Koopman has shown how the instantaneous-feedback mechanisms used by Uber and Lyft have proved far more effective than the bureaucratic systems created by past taxi regulators.
For example, the D.C. Code requires the DFHV to “modernize” the taxicab fleet, including specifying a meter system, cruising/dome light and vehicle color scheme. But the fact that the recent regulatory changes are the third attempt to improve D.C. taxis in the past decade speaks volumes: Mandated modernization cannot rival the innovative pressure that ride-hailing apps have introduced by giving consumers a better option.
The D.C. Code also includes well more than 100 pages of regulations that the DFHV must administer, making it more difficult for regulators to accomplish all the necessary taxi reforms by themselves. Going forward, the D.C. Council should support the department in its reform efforts.
Many other major cities have already enacted reform. Fort Worth’s extensive deregulations, which went into effect in October, feature one limited set of rules for all for-hire vehicles. Several municipalities in Florida repealed their taxi laws, allowing customer choice to decide service type and quality.
DFHV Director Ernest Chrappah should be applauded for his drive to bring dynamism and competition to stagnant taxi markets, but much more remains to be done. The D.C. Council and the DFHV can save the sinking taxi industry by leveling the playing field with Uber and Lyft, which currently have far more flexibility to adapt to customers’ needs. The result will be a better future for D.C. residents, visitors and for-hire drivers.