Should Taxis Be Regulated? Report on the first discussion of the iEkonomie.cz meeting

The first discussion of the iEkonomie.cz meeting concerning the regulation of taxi services took place on 6 February 2017 at CERGE-EI with Ondřej Krátký of Liftago. The discussion was packed with interesting insights and was attended by numerous members from academia, students, and interested parties. This was the first of a new series of discussions in which academia interacts with business to generate inspiring ideas and solutions that benefit from creating a bridge between these two worlds. We bring you an overview of the topic discussed.  

What is iEkonomie.cz?

iEkonomie.cz is a project led by Filip Matějka aimed at generating public and academic debate on important public policy issues. During the discussions, academics, professionals, researchers, and students answer specific questions about their articles, analyses or ideas. At the end, participants vote on how to answer the posed question and make recommendations based on the various contributions. The project provides an example for students to see theoretical knowledge applied to real-world problems, a mutual learning environment for participants, and a forum for the public to learn about the opinions and consensus of experts. Contributions are submitted by members of Czech and foreign academia, experts from the private sector, students from universities across the country, and occasionally even by Nobel Prize winners connected to CERGE-EI. The discussion concerning the regulation of taxi services was an extension of the very first “warming up” topic debated at iEkonomie.cz.

Theory of market regulation by Filip Matějka

Filip Matějka started off the event with a brief overview of the basic assumptions of economic theory related to the regulation of markets. The foundational ideas of economists regarding markets are formalized in the first welfare theorem. If there is perfect information, no transaction costs, and no market power, the outcomes of the market will be Pareto optimal. Pareto optimality means that no person can be made better off without another person making his own situation worse. All opportunities for mutually beneficial exchange have been exhausted. In the real world, the closer markets are to these unrealistic assumptions, the stronger the presence of the famous invisible hand. Led by the invisible hand, markets coordinate efforts and aggregate individual needs and local information into the complex system of our economy. Dealing with local information and individual needs is something that government is not able to do efficiently, and is the main reason for the unsustainability of a centrally planned economy.

If the assumptions of this theorem are sufficiently violated by the presence of monopolies, externalities, and asymmetry of information between different participants, then markets are not able to achieve Pareto optimal results. Market failures appear. In this case, government can intervene with regulation to mitigate these market failures and help to improve the outcome of the market. The regulation of taxi services through price controls, permits, and taximeters has historically been the preferred approach to dealing with market failures. With technological advancement, however, the market is forcing government to reevaluate its regulatory role.

Differences between Liftago, Uber, and AAA taxi by Ondřej Krátký

Ondřej Krátký, co-founder of Liftago, followed with a presentation on the difference between his company and the other two largest companies on the market, Uber and AAA taxi. As Filip Matějka pointed out during the presentation, today companies are actively designing their own markets and competing in their design. Each company follows a different business model and has a different idea about how to facilitate transactions between drivers and customers. Uber focuses on the needs of customers, offering the lowest possible price and fastest pick-up. It achieves this by providing no opportunity for drivers to set the price or to see the final destination of a ride before accepting it. Matching between customers and drivers and pricing is fully determined by Uber’s internal algorithms. The customer is not able to select the driver, only the type of service.

Liftago follows a different approach by focusing more on the needs of drivers. The driver sees the starting and ending point of the requested ride and is able to set a price for it. More than one driver is asked to bid for the ride, and ultimately the consumer chooses between drivers based on the price offered and customer ratings. Drivers are able to set their price using individual local information; they can offer a lower rate for a longer ride or for a ride that ends closer to their home. In addition, all Liftago drivers are fully licensed professional drivers.

During the presentation, there was a lively debate among members of the audience, which consisted of academics, students, representatives of different taxi companies, and a number of taxi drivers, who all shared their experiences using different companies. The discussion touched upon the topics of current legal violations by Uber, possible discouragement of car sharing by excess regulation of taxi services, and the impact of new sharing services on the economy.

New market regulation by the Ministry of Transportation

The event was attended by a member of the committee preparing new regulation by the Ministry of Transportation. He described the current state of discussion on the regulation of the taxi market. In line with the reasoning in an analysis by a group of CERGE-EI students posted on iEkonomie.cz, the market will be split into two markets with different regulatory conditions. App-based ride and taxi services, including Uber, will have to comply with less strict regulation compared to traditional taxi operators, but they will only be able to answer calls made via the app, not pick up customers on the street. In addition, using GPS rather than a certified taximeter will be an acceptable device for measuring the distance driven. To pick up customers on the street without using an app, drivers will have to comply with nearly the same level of regulation that exists today. Specific details of the regulation will be known once a proposal of the new law has been drafted and voted on.

More discussions to follow

The whole discussion lasted 30 minutes over the planned time and had to be ended by the organizers before all questions were answered. This illustrates the high level of interest in and the importance of economic debate on challenging current topics. iEkonomie.cz will be organizing more discussions on current public policy issues. You can follow iEkononomie.cz on Facebook for the latest information and invitations.

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