Art Carden  

Scenes from the Rent-Seeking Society: A Final Post on Ride Sharing and the Importance of Constitutions

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As I tweeted yesterday, a quick review of the battle over ride-sharing regulation in cities around the world convinces me we're building a bridge to the eighteenth century. Mercantilism is alive and well, and cities (like Birmingham) are missing a huge opportunity to revisit regulations that, in a 21st century economy where information is widely available and transparency is the norm, are unnecessary. Instead of trying to force Uber and others to play by taxi regulations and instead of creating a regulatory carve-out for ride-sharing services like Uber and Lyft, the city should've just scrapped the entire set of requirements for people willing to drive others around in exchange for money.

The Public Choice lessons are interesting and disheartening. Every day that passes that Birmingham-area residents don't have access to ride-sharing apps is another day in which we're all worse off relative to what might have been. Uber, in spite of their claim that they would simply walk away from Birmingham if they didn't get what they wanted, has redoubled its efforts.

In a few points:

1. If Uber, Lyft, Sidecar, and others set up shop in Birmingham, they will create gains from trade.

2. Uber and City Council are consuming valuable resources fighting about whether companies like Uber will be allowed to enter the market and create these gains from trade.

The entire saga illustrates the importance of the rules by which rules are made. From the perspective of society at large, the battle over the rules governing the conditions under which people will be allowed to do certain things is pure social waste. Note that it isn't the transfer that is the waste: if Uber, Lyft, and Sidecar could compensate incumbents and those with veto power over their entry, then at least in a static sense we could get an efficient outcome. The social waste is reflected in the resources consumed in the fight over the rules.

As with almost issue, I'm learning there's an EconTalk episode for that. And it usually features Mike Munger. Like this one on rent-seeking. And this one on the sharing economy.


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COMMENTS (12 to date)
Effem writes:

Of course I agree that all this time spent arguing over outdated rules is time wasted.

However, I also believe that the LEAST FAIR way to address this is to: 1) allow a challenger to enter the market unencumbered by the rules, 2) to turn a blind eye, 3) to give that challenger sufficient time to generate profits and build a brand and infrastructure such that they become a legitimate (and possibly superior) competitor, 4) then argue over whether the rules should be changed.

In my opinion, uber should be kept out of markets until the regulations are adjusted so that everyone is on an even playing field. At that point, if uber can "win" then they deserve it and have done it via a better business model, not via "regulatory arbitrage." Anyone can win a rigged game.

As a consumer of course I want uber in my market ASAP. However, my sense of ensuring some notion of fairness is stronger than my desire to save a few bucks.

Tom West writes:

It's important to remember why these rules were created in the first place. While I am certain that there's a lot of incumbent protection occurring now, much regulation comes about in response to citizen complaints.

Personally, I would like to see a return to at least a substantially less regulated taxi industry. However, I would not be surprised if within a decade, a substantial portion of the current system of regulation was re-implemented because that is what the citizenry demanded.

Glen Smith writes:

Effem,

How is anybody encumbered? Those who now need licenses would only need to be licensed because they decide to stay licensed, this is not encumbered.

Effem writes:

Glen,
So if I'm a NYC medallion owner I can do what, exactly?

marris writes:

@Effem As far as I know, no regulation stopped the taxi companies from building a phone app. So they too could have built an infrastructure.

Further, I can think of even less fair ways to do this, such as carve out regulation exceptions for one company over another (for Uber but not Lyft).

If you're an NYC medallion owner, you can try to get together with other medallion owners to make ride sharing apps. Or you can petition to sell your medallion back to the state for some specified price (maybe based on an index) and enter the no-medallion competition. Maybe the state could pass a ride sharing tax to pay for the medallion buybacks.

ThomasH writes:

I think Tom West has it. This is less a case of rent seeking (are the taxi companies in Birmingham demanding the existing regulations?) or just regulation that might have been reasonable at one time not getting periodically updated. It's like employer "provided" health insurance, probably welfare improving in the 1940's but not good for today.

Effem writes:

@marris

Taxis have phone apps (at least in NYC). The point of unfairness is that there are government-mandated costs of being a taxi that uber does abide by (Airbnb is a similar situation vis-a-vis hotels).

The government IS favoring one company over another. Uber, etc over "Yellow-taxi inc."

Governments should simply enforce existing regulations equally until it is able to revise them. Why is that so hard?

Glen writes:

It certainly doesn't help the situation when professional economists refer to companies like Uber, Lyft and Airbnb as creating (or operating in) something called the “sharing economy.”

Hazel Meade writes:

@Tom West,

The thing is that technology has solved most of the problems regulations were intended to solve.

Prior to the internet, when you rented a cab you had no way of knowing the reputation of the cab driver. You might want him to show some sort of certification to prove he was not a criminal, and that he knew how to drive, etc. Leaving aside whether that could be handled privately, the state's licensing served the purpose of assuring riders that they were getting a competent ride.

But with the advent of the internet, it is now possible to instantly gain access to reputatonal information about the driver via user reviews. You don't need to see that certificate to know if the driver is competent or not.
So the state licensing scheme is no longer providing any value to consumers.

Tom West writes:

Hazel, do you honestly think most people are going to check reputation while flagging a cab?

I could be wrong, but I honestly think that in the face of complaints where the the identification is nothing more than "I got into a cab", there'll be strong calls for regulation.

I think there will be calls for more regulation until it is felt that the government is doing what it can so that the average citizen can go into anything remotely cab-like and not face "unfair" charges, discrimination, health risks, drivers who are not conversant in the main language, uncomfortable seating, etc.

I'm not saying this is how it *should* be, but this is what I see.

My general rule of thumb is that regulation occurs until about 95% of the population feels safe, regardless of how careless they are. At the 95% mark, the steps necessary to protect the remaining 5% are *so* onerous that the 95% start to wonder about the cost (in $ and in loss of freedom).

Daublin writes:

@Tom West, while it's true there is a small gain from some degree of regulation of taxis, the main effect has for a long time just been to prop up rents to the incumbant taxi providers. This was already a problem before ride sharing, so it's interesting that a new business model is causing these old questions to be revisited.

If you take a ride with some random guy with a van--not that I'm saying you should--the cost difference is far too large to explain via safety concerns. The bulk of it is due to regulations such as a resrtiction on the total number of taxi medallions that are available in a given city. It's hard to see a restriction on the number of medallions as being a way to improve public safety.

I think on net that brand names would work just as well as regulation, in most cases. The public often underestimates how hard a reputable brand will fight to protect its name. Kroger doesn't give you good food because it's the law; they give you good food because you can't stay in business selling crappy food.

Tom West writes:

Daublin, I agree with almost everything you say there.

However, while safety guides regulation, it's important to understand that it's perception that's important. If a bad thing happens and there was nothing to prevent it, that's negligence on the part of the regulator. If a bad thing happens, but efforts that *feel* reasonable where taken, that's life (but a tragedy).

Hence various measures don't need to increase safety relative to cost in order to be demanded by the populace. They merely need seem reasonable, understandable attempts to prevent the bad thing happening.

For example, I believe medallion restrictions are supposed to ensure that everyone is making enough money that they don't need to skimp on safety, service, etc.

Does it work and is it worth the cost? I don't know, but it doesn't matter. Failure to implement such a program *feels* like negligence on the part of the voter. When the bad thing happens anyway, at least we've tried our best.

As I've said many times, for unlikely small-scale problems, the appearance of trying protect us increases happiness far more than the relatively minor prevention itself. After all bad things may only happen 0.01% of the time, but we're happier knowing we're trying to prevent the bad thing the other 99.99% of the time.

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