Commentary

December 09, 2016

William Watson: One asset value that’s falling fast—taxi licences

EST. READ TIME 3 MIN.

You hate to revel in anyone’s economic misfortune, especially around Christmas time. But there’s a group in Quebec society that’s suffering a big capital loss these days and, though maybe it’s ungenerous to say so, that’s all to the good. That group is the owners of taxi licences.

Licences are in legally limited supply but are transferable on open markets. Not so long ago they were selling for around $200,000. But lately, as this news story from CTV’s Montreal affiliate reports, owners have been having trouble getting $120,000.

That’s rough on them, of course, and they deserve at least a little seasonal sympathy for their loss. But before getting too worked up on their behalf, remember that the licence has a value greater than zero only because taxis—unlike most other economic activities—are able to charge prices that exceed their other costs of production. Prices must exceed costs of production, otherwise no one in their right mind would pay anything for a licence.

How can prices exceed costs? Because supply is legally limited.

Or at least it was. But as everyone knows, there are now apps for taxis—Uber being the best known but by no means the only one. Taxi apps effectively end the artificial limitation of supply in the industry. And when the limits on supply go, so do the above-cost prices. Who would pay $200,000 for a taxi licence when anyone who wants to earn a few bucks driving part-time can now enter the market?

Actually, free entry isn’t the reality yet. The Quebec government has been playing tough with Uber and imposing severe restrictions on it, mainly to make sure Uber riders pay sales taxes, which probably they should, but also because taxi owners have been making a big stink about having to face competition. The first concern is reasonable; the second involves syndromes as old as government itself, but has no real justification. What’s so special about taxis that they should be exempted from the normal rigours of competition?

Quebec badly wants to sell itself as being a cool, ultra-modern, tech-savvy, wired place and that doesn’t accord very well with outlawing Uber and similar apps, a downright antediluvian approach that was its first kick at the Uber “problem.” Subsequent elaborations of its new taxi policies have been more Uber-friendly, however. And it appears potential taxi drivers have been getting the point. So the prices of permits have been falling.

Permit prices closer to $100,000 than $200,000 are better from the consumer point of view. The lower price indicates a belief among licence purchasers that taxi fares will be closer to the level truly competitive markets would set. But $100,000 is a hundred grand too much. The government should not rest until it drives the value of permits all the way down to zero.

The rule for getting into driving people around for money should be that you show you are “fit, willing and able” to do so, nothing more. We can pity the poor licence owners, as we pity almost anyone who suffers a big capital loss. And we can work on compensating them for their loss, possibly with a temporary tax on all taxi rides. But we should respond to their entreaties for continuing exemption from competition with what should be our unvarying response to all pleas for privilege: “Bah, Humbug!” 

 

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