Part D – Understanding and improving industry performance (PDF ...

2. Supplying uneconomic services
The second argument in favour of entry restrictions
is that taxis are ‘common carriers’ forced to provide
uneconomic services alongside more profitable services
and that it is necessary to restrict competition and keep
order in the market for these services to continue. For
example, there are rules that unprofitable short fares
cannot generally be refused and that taxis should provide
services continuously across the week. This issue is
raised most often in relation to country areas, where taxis
are seen as having more of a ‘public transport’ role.
There are two problems with using entry regulation
to compensate taxi operators for providing
uneconomic services:
• First, commercial firms operating in such a market
will always face strong incentives to only do things
that are commercial, as this will maximise their profits.
Therefore, a high degree of monitoring by the regulator
will be required to enforce the regulations. This is
apparent in the Melbourne metropolitan zone in the
significant reported issues around short fare refusals.
• Secondly, it is very difficult to determine by ‘how
much’ competition should be restricted to achieve the
objective. The industry will face strong incentives to
overstate the costs of providing uneconomic services,
as this will achieve a greater degree of restriction and
a higher level of profitability.
A final point is that it would be more transparent and
efficient for government to fund any uneconomic
services directly.
It is not obvious to the inquiry that the benefits of
requiring operators to provide uneconomic services could
exceed the costs of restriction identified earlier.
3. Improving industry viability
The third argument supporting restrictions on licences
is that they improve the viability of the taxi industry by
minimising ‘dead running’ (the costs of running the taxi
unoccupied) because occupancy is kept higher than it
might otherwise be. Undoubtedly, entry restrictions do
keep occupancy rates higher. This provides an efficiency
benefit in that fewer vehicles are required to produce a
given quantity of taxi trips. However, the inquiry notes
two problems with using licence restrictions to keep
occupancy high:
• The value to taxi operators of generally higher
occupancy rates becomes factored into the rental
price of the licence 45 – This effect may be understood
by considering what would happen if the number
of taxis was reduced: occupancy rates are likely to
rise 46 and so will the profitability of all taxi operators.
However, this effect will be temporary. Operators
will compete for new assignments by bidding
away the new profits that are created. The value of
the ‘occupancy benefit’ is therefore appropriated
by licence holders. The implication of this is very
important: the financial pressures faced by operators
and taxi drivers, and the incentive to cut costs and
overcharge passengers, will be the same as when
there are no licensing restrictions. If the operator has
to lease a licence, the required occupancy rates for a
taxi operator to break even are much higher than they
would be if licences were not restricted (and had no
value). In other words, there is no sustainable benefit
that can accrue to either taxi operators (or indeed
to taxi drivers) from licensing restrictions unless
further restrictions are imposed. Service delivery
can therefore be expected to be no better under a
restricted entry regime than an unrestricted regime.
• Restricting the number of vehicles makes waiting
times longer for consumers than they would
otherwise be at certain times or locations – This
has the effect of reducing consumer demand for
taxi services and reducing the number of trips
undertaken. As identified earlier in this chapter, using
entry controls to increase efficiency can only be
justified if the introduction of new vehicles will have
no effect on waiting times (and therefore on demand)
or that lower waiting times do not affect demand.
If not, there is a risk that the licensing authority will
set supply at a level that does not deliver the kind
of service that consumers prefer. Consumers may
prefer a service with lower waiting times, even if
higher prices result from lower occupancy rates.
Many submissions to the inquiry suggest that
service availability is lacking at certain times, not
just in Melbourne but across Victoria. Without entry
restrictions, waiting times would almost assuredly be
lower and demand higher at peak times.
45 Only better-than-average occupancy performance cannot be captured
by licence holders
46 So long as the increase in waiting time does not decrease demand so
much that trips per vehicle falls
194