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Taxis vs. Uber: How economic illogic is taking passengers for a ride

A sign is illuminated on a taxi parked near the London Taxi Company in Coventry, central England October 22, 2012. REUTERS/Darren Staples (BRITAIN - Tags: BUSINESS POLITICS TRANSPORT)

DARREN STAPLES/REUTERS

Here's a thought experiment: Imagine what would happen if a municipal government set up a licensing system for restaurants, but with the express purpose of artifically limiting the number of restaurants in a city.

In other words, a licence would not be open to anyone who could meet standards of cleanliness or quality of service. Instead, there would be only a set number of restaurant permits. As a result, many aspiring restauranteurs would not be able to open a restaurant – not due to lack of market demand, but because of a policy designed to ensure there would never be enough licences to go around.

Question: Would this system drive up the wages of restaurant workers? Or would it create a new form of investment property – the restaurant licence – likely to enrich investors who had the good sense to get in on the ground floor?

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This is not a fictional story. It's how the taxi business works, to a greater or lesser extent, in many if not most North American cities. Municipal governments created a scarcity – and as a result, licences allowing some people to do business in a market where demand always exceeds supply can be exceptionally valuable. Nobody has ever gotten rich driving a taxi, but in New York City, a taxi medallion is worth US$800,000. In Toronto as recently as two years ago, taxi licences were selling for $250,000 or more.

That money is, by the way, going to license investors, not the city.

The system has been visibly broken for a very long time, but well-lobbied city governments have often been dissuaded from doing too much to change it. Then new technology arrived. Ride-sharing services such as Uber started detouring around the rules. Last week, one of America's largest providers of business-expense management software said that nearly 47 per cent of its customers were using Uber when they travelled on business, and not a local taxi.

This is partly a story about entrepreneurship and innovation. But mostly it's a tale of bad, costly, counterproductive regulation being exposed for what it is. Ride-sharing services are taking aim at a man-made problem – one that, decades before the invention of the smartphone, was already ripe for the unmaking.

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