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

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10.2.4. Valuing the effect of licensing restrictions on the community Licence values measure the expected profit that can be earned from using or leasing the licence. The existence of high licence values suggests that there are some potential welfare gains for the community if these profits could be removed and lower prices charged. The reason is that, in general, consumers gain more from lower prices than the producers making the profits lose. This is because the high prices underpinning the profits cause consumers to consume less than they would at a lower price, and these units of output lost are valued at more than they would cost to produce. Economists and review authorities have often attempted to measure the size of the welfare loss and/or potential welfare gain caused by restrictive licensing. This involves estimating the shape of demand and supply curves for taxi services, and comparing the actual price and quantity combination under restrictive entry with an alternative combination estimating a different price and quantity combination. For example, in the 1999 KPMG report, the size of the loss was estimated by calculating a ‘competitive price’ for taxi services and measuring the gains and losses to consumers and producers at this new price (which removed the licence value from the average price). 47 At this lower price, there is no new entry by taxis because all the expected profits from entering have been removed. A weakness with these estimates is that they assume that prices can merely be reduced to a competitive price (by regulation) with no effect on demand. But evidence from actual taxi markets suggests that the reality is not this simple. Supply and demand are likely to be interdependent: more supply increases vacancy rates, which lessens waiting times and creates more demand. The strength of these effects can be very important. Lowering prices, which would increase demand, also reduces the supply available to other potential consumers and can lengthen waiting times. This causes the demand curve for taxi services to shift inwards, meaning that less will be consumed at the prevailing price. The result of this complexity is that standard approaches to measure welfare effects are likely to be wrong. They can overstate or understate welfare losses because they do not account for the effect of waiting times on consumer demand. How wrong they are will depend upon how important waiting times and reliability are for consumers. For example, if consumers value waiting time very highly: • The potential welfare gains from simply lowering fares while assuming the number of taxis remains unchanged will be overstated and possibly even illusory. The loss consumers would experience from reduced availability (driven by the lower price) could outweigh the gains from the lower price. • If more taxis enter even at the lower price and stimulate demand significantly, then estimates of welfare gains based on no new entry may well understate the gains from removing entry restrictions. Whether the waiting time effect is important or not will depend upon the facts in each particular market; for example, if entry policies have been very restrictive, this effect is more likely to be important. This analysis also raises the possibility that an alternative way to improve community welfare could be to leave prices unchanged – or even to raise them – but remove restrictive licensing policies. This outcome would undoubtedly result in many new taxis and dramatically increased availability. If waiting times are particularly important (for example, where entry restrictions have stifled demand for many years), this may be desirable. However, if this policy is adopted where waiting time is not highly valued by consumers, the result could be significant new entry but no significant increase in demand. This would lead to an increase in industry cost (falling taxi productivity), but for little consumer benefit. This appears consistent with the ‘excess entry’ experience of some overseas jurisdictions. These considerations are illustrated graphically in Figure 10.3. The first diagram shows the benefits to consumers from reducing fares by removing assignment fees from fares and assuming that waiting time can be held constant (fares fall from f 0 to f 1 ). The gains to the community are represented by the shaded triangle (this does not consider the transfer between licence owners and consumers as a welfare gain). The second diagram illustrates a situation where fares remain at their present level, but sufficient new entry is allowed to reduce the profits from operating a taxi to zero (costs increase from c 0 to f 0 ). This reduces waiting times and increases the demand for taxi trips. In this example drawn with a linear (straight line) demand curve, the gains to the community from the increased number of trips and the value of those trips will significantly outweigh those from lowering fares without allowing new entry. This occurs even though costs have increased and ‘A’ appears as a welfare loss. 47 A similar exercise was undertaken in the ESC’s 2008 fare review and in Gaunt, C. and Black, T. (1996), ‘The economic cost of taxicab regulation: the case of Brisbane’ in Economic Analysis & Policy, vol. 26, no. 1, March 1996, pp.45–58 Understanding industry performance CUSTOMERS FIRST 195
Figure 10.3 Comparison of community gains from fare reductions and from greater availability Fare reduction Greater availability Fares Fares Community gain = B - A Community gain B f 0 Q 0 Q 1 Taxi trips or kms f 0 Q 0 Q 1 Taxi trips or kms f 1 c 0 A Demand 10 min wait Demand 5 min wait Demand 10 min wait Source: TII The inquiry also notes that the above analysis means that simple comparisons about fares across jurisdictions with different entry policies can often be misleading. In particular, even if fares are lower in a closed entry system, this does not imply consumers are better off. The availability effect means that consumers can actually be better off even if they pay higher fares; even a small increase in availability may have significant positive effects because the value created by shifts in demand (caused by better availability) outweigh the losses from higher fares. The New Zealand experience appears to be a good example of this effect. As highlighted in chapter 9, fares are somewhat higher in New Zealand than in Australian cities, yet there are many more taxis operating sustainably in New Zealand. Consumers may well be better off due to greater taxi availability than in the Australian closed entry systems. Ultimately, this depends on whether more trips are consumed and how much consumers value these trips. A better approach to measuring possible welfare gains from removing or reducing entry restrictions is to take the demand and supply interaction into account. This introduces an additional source of complexity into estimations of the likely effects of removing entry restrictions and/or lowering fares. Given these constraints, it is helpful to classify the kind of results that might be expected from removing entry restrictions under a number of scenarios. 1. Waiting time effect is not significant, lower prices with number of taxis unchanging 2. Waiting time effect is not significant, prices unchanging with more taxis entering 3. Waiting time effect is significant, lower prices with number of taxis unchanging 4. Waiting time effect is significant, prices unchanging with more taxis entering The likely outcomes of different policies around entry and fares, in comparison with the current situation, are shown in Table 10.2. Table 10.2 Likely welfare outcomes compared to existing situation Outcome compared to existing situation Waiting time effect Significant Not significant Policy change Lower price, number of taxis fixed Price fixed, number of taxis increases Worse Consumers value availability more than lower fares Better More availability stimulates substantial new demand Better Consumers value lower fares more than better availability Worse ‘Excess’ entry and too many taxis service passengers 196
Page 2 and 3: Part D Understanding industry perfo
Page 4 and 5: The number of licences is restricte
Page 6 and 7: 9.2.2. Quality and safety controls
Page 8 and 9: Case study New Zealand’s experien
Page 10 and 11: Case study Singapore’s unique reg
Page 12 and 13: Case study London’s quality contr
Page 14 and 15: A report commissioned by the inquir
Page 16 and 17: Another possible explanation for hi
Page 18 and 19: From these comparisons, we can obse
Page 20 and 21: New Zealand is an example of a taxi
Page 22 and 23: Chapter 10. 10. Taxis, hire cars an
Page 24 and 25: 10.1.2. Substitution with public tr
Page 26 and 27: Nonetheless, there are market mecha
Page 28 and 29: 10.2.2. Detriments from restriction
Page 30 and 31: On the other hand, some submissions
Page 32 and 33: 4. The regulatory burden of decidin
Page 34 and 35: Country licence releases and the pu
Page 36 and 37: 10.2.3. Are there offsetting benefi
Page 38 and 39: The inquiry conducted research into
Page 42 and 43: It would also be possible to implem
Page 44 and 45: Inquiry findings è The detriments
Page 46 and 47: In its 1999 report, KPMG argued tha
Page 48 and 49: 10.3.4. Effect on taxi operators an
Page 50 and 51: The practices raised with the inqui
Page 52 and 53: Historically, the zones generally r
Page 54 and 55: Merging the taxicab markets of two
Page 56 and 57: A further summary of these data is
Page 58 and 59: 10.5. Regulation of taxi-cab fares
Page 60 and 61: • It exposes taxi operators to a
Page 62 and 63: KPMG argued that these restrictions
Page 64 and 65: 10.7. Vehicle regulations Taxis and
Page 66 and 67: Advertisements The policy to remove
Page 68 and 69: In recent years, NSPs have increase
Page 70 and 71: Some respondents argue that the mar
Page 72 and 73: Driver obligations to the NSP NSPs
Page 74 and 75: There are nine accredited secondary
Page 76 and 77: From 1953, the use of two-way radio
Page 78 and 79: 11.4.2. Mandatory network affiliati
Page 80 and 81: The inquiry considers that there is
Page 82 and 83: Walters FM also said: Until such ti
Page 84 and 85: The ACCC has been called on a numbe
Page 86 and 87: The ACCC also noted that West Subur
Page 88 and 89: This also means that other NSPs and
Page 90 and 91:
Metropolitan NSPs charge affiliatio
Page 92 and 93:
Figure 12.1 Average fare costs, met
Page 94 and 95:
11.8.3. Affiliation with more than
Page 96 and 97:
However, unlike most other goods an
Page 98 and 99:
12.3. Characteristics of the paymen
Page 100 and 101:
A further key feature of two-sided
Page 102 and 103:
Case study Cabcharge penalised for
Page 104 and 105:
To compete with Cabcharge, the newe
Page 106 and 107:
12.5.1. Removing regulatory barrier
Page 108:
In addition, given the well establi
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