FTC Staff Comment to the Hon. John Binkley Concerning Alaska H.B. 376 to Give Municipalities Broad Authorization to Regulate Taxis

Seattle Regional Office
2806 Federal Building
915 Second Avenue ._
Seattle. W ..hingto~ 98174
(206) «2-4655
-.l-. --tu--±.
Representative 	Johne 	Binkley
Pouch 	V
Juneau, 	Alaska 	99811
Re: 	House 	Bill 	No. 	376
Dear 	Mr. 	Binkley:
Thank 	you 	for 	requesting 	our 	comments 	on 	House 	Bill 	376, 	"An 	Act
relating 	to 	municipal 	regulation 	of 	vehicles 	for 	hire," 	which
would 	give 	broad 	authorization 	to 	municipalities 	in 	Alaska 	to
regulate 	taxicabs 	and 	other 	vehicles 	for 	hire. 	Municipalities
would, 	among 	other 	things, 	be 	authorized 	to 	regulate 	entry 	and
establish 	rates. 	The 	comments 	that 	follow 	discuss 	primarily 	the
effects 	of 	regulating 	taxicabs, 	an 	area 	in 	which 	the 	Federal
Trade 	Commission 	has 	long 	~een 	involved.
This 	letter 	represents 	the 	views 	of' the 	Seattle 	Regional 	Office
and 	the 	Bureaus 	of 	Competition, 	Economics, 	and 	Consumer
Protection 	of 	the 	Federal 	Trade 	Commission. 	The 	views 	expressed
here 	are 	not 	necessarily 	those 	of 	the 	Commission 	or of 	any
individual 	Commissioner, 	although 	the 	Commission 	has 	authorized
their 	submission.
The 	Federal 	Trade 	Commission's 	past 	involvement 	with 	taxicab
regulation 	has 	included 	staff 	comments 	and 	testimony 	on.proposed
legislation 	in 	a 	number 	of 	jurisdictions, 	an 	economic 	study, 	and
antitrust 	enforcement 	actions 	against 	two 	municipalities. 	All 	of
these 	actions 	are 	consistent 	with 	the 	Commission's 	goals 	of
promoting 	competition 	and 	protecting 	consumers .
.
As 	long 	ago 	as 	1978, 	the 	Commission's 	Seattle 	office 	submitted
comments 	in 	support 	of 	deregulating 	taxicabs 	in 	the 	City 	of
Seattle. 	More 	recently, 	the 	Commission 	staff 	submitted 	its 	views
on 	proposed 	legislation 	relating 	to 	taxicab 	regulation 	in 	the
cities 	of 	Anchorage, 	Seattle, 	Chicago, 	San 	Francisco, 	and
Washington, 	D.C., 	as 	well 	as 	in 	the 	State 	of 	Colorado. 	In 	1984,
the 	Commission 	issued 	complaints 	against 	the 	municipal
governments 	of 	Minneapolis 	and 	New 	Orleans 	for 	engaging 	in
regulatory 	activities 	that 	the 	Commission 	had 	reason 	tp 	believe

Representative 	Johne 	Binkley 	Page 	2
limited 	the 	number 	of 	taxicab 	licenses 	and 	lessened 	competition,
thus 	harming 	consumers.1J
Under 	current 	law, 	municipalities 	are 	free 	to 	regulate 	taxicab
operations. 	However, 	this 	freedom 	is 	tempered 	by 	the 	possibility
of 	suits 	for 	injunctive 	relief 	if 	the 	regulatory 	program
conflicts 	with 	the 	federal 	antitrust 	laws.lI 	State 	legislation
can, 	under 	the 	state 	action 	doctrine, 	reduce 	the 	possibility 	of
antitrust 	suits 	if 	it 	directly 	authorizes 	an 	anticompetitive
regulatory 	program.lI
Whenever 	market 	failures 	exist 	that 	warrant 	regulation, 	state 	or
local 	authorized 	regulation 	can 	potentially 	benefit 	consumers.
On 	the 	other 	hand, 	consumers 	can 	be 	injured 	by 	regulation 	that
restricts 	entry 	and 	increases 	prices. 	Our 	experience 	indicates
that 	taxicab 	regulation 	that 	restricts 	entry 	and 	controls 	fares
frequently 	has 	the 	effect 	of 	supplanting 	competition 	and
increasing 	prices 	paid 	by 	consumers. 	Accordingly, 	enactment 	of
House 	Bill 	376 	in 	its 	present 	form 	may 	adversely 	affect 	consumers
in 	Alaska.
Entry 	Restrictions
The 	Commission's 	1984 	complaints 	against 	Minneapolis 	and
New 	Orleans 	alleged 	that 	the 	two 	cities, 	in 	concert 	with 	local
taxicab 	companies, 	had 	violated 	the 	antitrust 	laws 	by 	restricting
entry 	into 	the 	market 	without 	adequate 	state 	legislative
authorization. 	The 	State 	of 	Louisiana 	subsequently 	passed 	a 	law
permitting 	its 	cities 	to 	regulate 	taxicab 	entry 	and 	fares. 	On
the 	other 	hand, 	Minneapolis 	joined 	those 	cities 	that 	have 	chosen
to 	permit 	more 	competition 	among 	taxicabsi/ 	by 	amending 	its
ordinance 	to 	permit 	more 	entry. 	Following 	these 	actions, 	the
Commission 	withdrew 	its 	complaints 	in 	both 	matters, 	without
determining 	whether 	liability 	could 	have 	been 	established 	in
either 	case.
1/ 	The 	Commission 	vote 	on 	issuing 	these 	complaints 	was 	3-2, 	with
Commissioners 	Bailey 	and 	Pertschuk 	dissenting.
11 	Local 	Government 	Antitrust 	Act 	of 	1984, 	15 	U.S.C. 	§ 	34 	et
~.
11 	Town 	of 	Hallie 	v. 	City 	of 	Eau 	Claire, 	105 	S. 	Ct. 	1713 	(1985).
if 	The 	FTC 	Bureau 	of 	Economics 	recently 	reported 	that 	in 	a 	five-
year 	survey 	covering 	103 	U.S. 	cities, 	16 	had 	substantially
relaxed 	entry 	restrictions 	and 	17 	had 	substantially 	relaxed-fare
controls. 	Frankena 	and 	Pautler, 	An 	Economic 	Analysis 	of 	Taxicab
Regulation, 	(Bureau 	of 	Economics 	Staff 	Report) 	(May 	1984) 	at 	8.
------------------------

Representative 	Johne 	Binkley 	Page 	3
In 	May 	1984, 	the 	Commission 	released 	a 	l76-page 	report 	entitled
"An 	Economic 	Analysis 	of 	Taxicab 	Regulation," 	prepared 	by 	its
Bureau 	of 	Economics. 	Among 	the 	principal 	findings 	of 	this 	study
was 	the 	conclusion 	that 	no 	persuasive 	economic 	rationale 	exists
for 	restricting 	the 	total 	number 	of 	taxicab 	firms 	or 	vehicles.
The 	study 	found 	that 	such 	restrictions 	waste 	resources, 	harm
consumers, 	and 	impose 	a 	disproportionate 	burden 	on 	low-income
people. 	On 	the 	other 	hand, 	the 	report 	notes 	that 	other 	kinds 	of
taxicab 	regulations, 	such 	as 	those 	which 	concern 	quality 	(for
instance, 	vehicle 	safety 	or 	liability 	insurance), 	may 	be
justifiable 	to 	protect 	consumers. 	We 	understand 	that 	you 	already
have 	a 	copy 	of 	the 	Bureau 	of 	Economics 	report.
The 	conclusions 	of 	the 	Commission's 	Bureau 	of 	Economics 	study 	are
not 	unique. 	Another 	recent 	study, 	commissioned 	by 	the 	U.S.
Department 	of 	Transportation, 	concluded 	that 	restraints 	on 	entry
of 	new 	cabs 	and 	regulations 	preventing 	fare 	discounting 	together
cost 	consumers 	nationwide 	nearly 	$800 	million 	annually 	in 	higher
fares, 	and 	result 	in 	38,000 	fewer 	jobs 	in 	the 	taxi 	industrY.21
Residents 	of 	Seattle, 	Washington, 	have 	been 	enjoying 	the 	benefits
of 	taxi 	deregulation 	since 	1978. 	During 	that 	time, 	over 	200 	new
jobs 	for 	taxi 	drivers 	have 	been 	created. 	Waiting 	times 	have
dropped 	because 	of 	the 	greater 	number 	of 	taxis 	on 	the 	streets.
Fares 	have 	risen 	more 	slowly 	than 	transit 	prices 	generally. 	Taxi
fares 	in 	Seattle 	are 	currently 	more 	than 	15 	percent 	lower 	than
what 	we 	estimate 	they 	would 	have 	been 	under 	continued'
regulation.6/ 	Despite 	efforts 	to 	reintroduce 	entry 	and 	fare
regulations~ the 	City 	of 	Seattle 	has 	thus 	far 	rejected 	proposals
to 	reestablish 	an 	anticompetitive 	regulatory 	scheme. 	Other
cities 	that 	have 	benefitted 	from 	reform 	of 	taxicab 	regulations 	to
permit 	more 	entry 	include 	Milwaukee 	and 	Madison, 	Wisconsin;
Jacksonville, 	Florida; 	Spokane, 	Washington; 	San 	Diego, 	Oakland,
Berkeley, 	and 	Sacramento, 	California; 	and 	Phoenix 	and 	Tucson,
Arizona.
An 	additional 	problem 	with 	restricted 	entry 	is 	that 	it
disproportionately 	affects 	those 	consumers 	who 	are 	most 	dependent
on 	cabs 	for 	transportation: 	the 	handicapped, 	the 	poor, 	and 	the
elderly. 	The 	members 	of 	these 	groups 	typically 	spend 	a 	larger
proportion 	of 	their 	incomes 	on 	taxi 	rides 	than 	other 	segments 	of
the 	population. 	In 	many 	areas, 	low 	income 	consumers 	make 	more
.- 	-
21 	H.C. 	Wainwright 	& Co. 	Economics, 	Regulatorv 	Impediments 	to
Private 	Sector 	Urban 	Transit, 	Volume 	II 	(March 	1984), 	at 	85.
!I 	Zerbe, 	Seattle 	Taxis: 	Deregulation 	Hits 	a 	Pothole,
Regulation 	(November/December 	1983), 	at 	43 	(copy 	at~ched).

Representative 	Johne 	Binkley 	Page 	4
use 	of 	taxicabs 	than 	those 	with 	higher 	incomes.71 	For 	these
reasons, 	increased 	fares 	and 	waiting 	times 	have-the 	largest
impact 	on 	those 	least 	able 	to 	bear 	them.
The 	principal 	beneficiaries 	of 	new 	entry 	limitations 	would 	be
those 	who 	already 	hold 	taxicab 	permits, 	since 	they 	would 	be
protected 	from 	competition. 	Limitations 	on 	the 	number 	of 	permits
can 	enable 	holders 	of 	existing 	taxicab 	permits 	to 	earn
supracompetitive 	profits. 	For 	example, 	we 	understand 	that 	the
City 	of 	Anchorage 	charges 	$750 	per 	year 	for 	a 	permit. 	Owners 	of
those 	permits 	typically 	resell 	them 	for 	as 	much 	as 	$45,000. 	This
high 	price 	for 	a 	permit 	is 	the 	capitalized 	value 	of 	the
supracompetitive 	profits. 	At 	current 	interest 	rates, 	investing
$45,000 	in 	a 	taxicab 	license 	is 	equivalent 	to 	making 	a 	daily
payment 	of 	$12.50 	to 	rent 	a 	license.81 	The 	fact 	that 	people 	are
willing 	to 	pay 	$45,000 	for 	a 	taxi 	permit 	indicates 	that 	they
expect 	taxi 	fares 	to 	exceed 	the 	costs 	of 	owning 	and 	operating 	a
taxicab 	-- 	and 	of 	making 	a 	normal 	profit 	-- 	by 	$12.50 	per 	day.
That 	is, 	consumers 	will 	pay 	daily 	fares 	that 	are 	$12.50 	per 	dav
above 	the 	cost 	of 	purchasing 	and 	leasing 	a 	vehicle, 	the 	cost 	of
gasoline 	and 	insurance, 	a 	take 	home 	wage 	for 	the 	driver, 	and 	a
competitive 	profit 	for 	the 	owner 	of 	the 	permit. 	This 	$12.50 	per
day 	does 	not 	cover 	any 	of 	the 	real 	costs 	of 	providing 	service,
nor 	is 	it 	a 	tax 	to 	maintain 	the 	streets. 	It 	is 	simply 	a 	cash
transfer 	from 	consumers 	to 	permit 	holders.
Recent 	experience 	in 	Anchorage 	provides 	additional 	evidence 	that
free 	entry 	would 	result 	in 	lower, 	not 	higher, 	fares. 	An 	increase
in 	the 	supply 	of 	any 	commodity 	or 	service 	will 	tend 	to 	drive 	the
price 	lower. 	In 	Anchorage, 	Checker 	and 	Yellow 	Cab 	tried 	to
charge 	$2.00 	per 	mile 	at 	the 	same 	time 	that 	Alaska 	Cab, 	which
entered 	in 	response 	to 	partial 	deregulation 	since 	rescinded, 	was
charging 	$1.40 	per 	mile.lI 	Alaska 	Cab's 	market 	share 	increased
from 	approximately 	12 	percent 	to 	70 	percent 	in 	just 	four 	months,
according 	to 	estimates 	by 	the 	Alaska 	Attorney 	General's 	office.
Ultimately, 	Yellow 	and 	Checker 	reduced 	their 	fares 	to 	$1.40 	as
71 	A recent 	study 	indicated 	that 	financially 	disadvantaged
consumers 	make 	up 	25 	percent 	of 	total 	taxicab 	ridership 	in
Seattle. 	P. 	Gelb, 	Taxi 	Reoulatorv 	Revision 	in 	Seattle 	(DOT
commissioned 	study) 	(September 	1.980), 	at 	102.
81 	At 	an 	annual 	interest 	rate 	of 	10 	percent, 	$45,000 	represents
the 	capitalized 	value 	of 	a 	perpetual 	stream 	of 	profits 	of 	$4,500
per 	year. 	For 	a 	cab 	in 	operation 	360 	days 	each 	year, 	$12.50 	must
be 	collected 	each 	day 	to 	equal 	$4,500 	in 	one 	year.
1/ 	For 	a 	story 	on 	the 	related 	price-fixing 	settlement, 	see
Anchorage 	Times 	(January 	23, 	1985), 	at 	A-I, 	A-12. 	,
-------- --------------- 	---..-_. -.. _.-.-----.---.-.-.---.-.-.-.--~~---

Representative 	Johne 	Binkley 	Page 	5
well.1QI 	Reports 	of 	the 	benefits 	of 	competition 	come 	also 	from
Jacksonville, 	Madison, 	Milwaukee, 	and 	Seattle, 	to 	name 	a 	few.
Special 	senior 	citizen 	discounts 	became 	available 	in 	Madison,
Sacramento, 	and 	Tucson 	following 	deregulation.
It 	has 	also 	been 	suggested 	that 	open 	entry 	reduces 	the 	quality 	of
vehicles, 	drivers, 	and 	service, 	but 	there 	is 	no 	reason 	to 	expect
that 	result. 	Allowing 	free 	entry 	will 	not 	prevent 	a 	municipality
from 	regulating 	the 	quality 	of 	taxi 	service. 	O~ 	the 	contrary,
municipalities 	can 	consider 	such 	things 	as 	safety, 	driver 	skill,
and 	liability 	insurance 	coverage 	because 	consumers 	have 	greater
difficulty 	evaluating 	these 	aspects 	of 	taxi 	service. 	Rather 	than
diminishing 	safety 	or 	quality 	of 	service, 	open 	entry 	means 	giving
licensees 	who 	are 	qualified 	the 	chance 	to 	compete, 	and 	giving
consumers 	lower 	fares. 	Moreover, 	open 	entry 	does 	not 	mean 	that
service 	will 	decline. 	Many 	cities 	report 	that 	service 	has
improved 	under 	deregulation. 	In 	Jacksonville, 	Oakland, 	and 	San
Diego, 	for 	example, 	open 	entry 	led 	to 	an 	increase 	in 	fleet
maintenance 	and 	a 	reduction 	in 	vehicle 	age 	as 	new 	fleets 	entered
the 	market. 	Moreover, 	in 	San 	Diego 	and 	Seattle, 	taxi 	competition
reduced 	the 	average 	waiting 	time 	for 	a 	cab.
Finally, 	open 	entry 	does 	not 	mean 	that 	all 	taxicab 	operators 	will
fail 	financially. 	As 	with 	most 	businesses, 	those 	who 	can 	offer
higher 	quality 	service 	at 	lower 	prices 	will 	prosper, 	while 	less
competitive 	operators 	will 	not. 	This 	is 	preci~ely what 	happened
in 	Anchorage, 	and 	that 	experience 	illustrates 	how 	taxicab
consumers 	respond 	to 	competition. 	This 	is 	also 	precisely 	what
makes 	a 	competitive 	market 	the 	most 	efficient 	kind 	of 	market 	for
allocating 	resources 	and 	maximizing 	consumer 	welfare.
Fare 	Restrictions
The 	regulation 	of 	taxi 	fares 	by 	municipalities 	supplants
competitive 	forces 	that 	will 	otherwise 	ogerate 	in 	the
marketplace. 	Our 	experience 	indicates 	that 	minimum 	and 	uniform
fare 	restrictions 	injure 	consumers. 	In 	particular, 	they 	raise 	at
least 	some 	prices 	to 	consumers, 	and 	they 	eliminate 	the 	ability 	of
innovative 	discounters 	to 	obtain 	the 	reward 	of 	increased 	market
shares 	for 	bringing 	lower 	prices 	to 	consumers. 	As 	we 	noted
above, 	higher 	fares 	disproportionately 	injure 	those 	who 	need
1Q/ 	The 	$45,000 	cost 	for 	a 	permit 	in 	Anchorage 	suggests 	that
even 	this 	fare 	level 	may 	exceed 	the 	level 	that 	would 	be 	found
with 	unrestricted 	entry. 	That 	people 	are 	willing 	to 	pay 	such 	a
high 	price 	for 	the 	right 	to 	drive 	a 	cab 	is 	evidence 	that 	they
expect 	to 	be 	able 	to 	charge 	fares 	above 	the 	competitive 	level.

Representative 	Johne 	Binkley 	Page 	6
taxis 	the 	most 	poor, 	handicapped, 	and 	elderly 	consumers 	-- 	and
who 	spend 	a 	larger 	proportion 	of 	their 	incomes 	on 	transportation
than 	other 	segments 	of 	the 	population.
A different 	situation 	may 	exist 	with 	regard 	to 	fare 	ceilings. 	In
some 	instances 	-- 	such 	as 	airport 	or 	railroad 	station 	taxi 	lines,
where 	consumers 	may 	find 	it 	difficult 	to 	comparison 	shop 	for 	low
fares 	-- 	a 	limited 	degree 	of 	maximum 	price 	regulation 	may 	be
preferable 	to 	complete 	deregulation. 	A study 	done 	by 	Professor
Zerbe 	on 	the 	effects 	of 	taxi 	deregulation 	in 	Seattle, 	which 	was
not 	written 	under 	the 	auspices 	of 	the 	Federal 	Trade 	Commission,
examined 	this 	question.lll 	The 	study 	indicated 	that 	maximum
fares 	may 	help 	to 	prevent 	clearly 	uninformed 	consumers, 	such_ as
travelers 	at 	airport 	and 	railroad 	station 	queues, 	from 	paying
exorbitant 	prices. 	Thus, 	the 	Legislature 	may 	wish 	to 	consider
allowing 	municipalities 	to 	set 	maximum 	taxi 	fares 	in 	certain
limited 	circumstances.
Conclusion
The 	Federal 	Trade 	Commission 	staff 	has 	long 	had 	an 	interest 	in
the 	effects 	of 	taxicab 	regulation 	upon 	competition 	and
consumers. 	We 	have 	concluded 	that 	regulations 	of 	the 	taxicab
industry 	that 	restrict 	the 	number 	of 	cabs 	or 	fix 	fares 	generally
hurt 	rather 	than 	help 	consumers 	and 	competition, 	and 	especially
harm:certain 	disadvantaged 	groups 	that 	rely 	on 	taxicab 	service.
In 	sum, 	we 	believe 	that 	municipalities 	should 	not 	impose
restrictions 	on 	taxicab 	entry 	and 	minimum 	fares. 	Any 	municipal
regulation 	of 	taxicabs 	should 	be 	limited 	primarily 	to 	ensuring
that 	service 	is 	safe 	and 	competent 	and 	that 	sufficient 	liability
insurance 	is 	maintained. 	It 	may 	also 	be 	appropriate 	to 	allow
municipalities 	to 	establish 	fare 	ceilings 	in 	some 	limited
circumsta~ces. 	The 	ability 	to 	regulate 	in 	this 	fashion 	would
allow 	municipalities 	to 	fully 	respond 	to 	legitimate 	public
problems 	and 	concerns.
We 	are 	grateful 	for 	this 	opportunity 	to 	present 	our 	views 	on
House 	Bill 	376 	and 	hope 	they 	will 	be 	of 	assistance 	to 	the
Legislature.
Sincerely 	yours,
-, 	") r 	' 	,
) I,.i ,J~,,\l''''''' L 	f -"-' ~ .~
Richard 	O. 	Zerbe, 	Jr.
Consulting 	Economi~t 	~}
~---72~J/
George 	J;.:q~l
Regional 	Qj.rector
,
111 	See 	Zerbe, 	supra 	note 	6, 	at 	46-48.
--- 	------------ 	. 	=~_~_._:::-:c-=c:--c-_.~	__O-:-O._~_~~ 	~~~	.. _..:.:.:.. .• __ ._

.'........ --- .#...-..:.,._.......~ ....--_.~~ ... _-_.__..... _.- _ 	.... _ ... ~ ... _. 	". - -_._.. - ._.
Seattle Taxis:
Deregulation
Hits a Pothole
Richard o. Ze~ Jr.
_0 _. __ ....... 	• ~ ..... o_ ...
ALL TOO OFTES. we talk vaguely about regu-
'. 	lating or deregulating "the market" for
some good or service. while forgetting
that most sizable markets are not ~nifonn en-
tities: they consist of a collec.tion of submar-
kets. often quite different from one another.
Policies that work well for competitive parts of
the market may work badly in the noncompeti-
tive pockets. and vice versa. Regulation itself
may represent a mix of "public-interest" and
self-interest effects and motives. so the effects
of deregulation may also be mixed. In general.
deregulation as well as regulation may have un-
expected side effects. The case of taxicab de-
regulation 	in Seattle shows why regulatory
reformers should keep this complexity in mind
-and what can happen when they do not.
Taxis came to be regulated in Seattle in
much the same way as in other U.S. cities. First
the powerful transit union correctly perceived
taxis as a thre.1t to buses :uld trollevs and called
for a halt to the "ruinous competit'ion" of cabs.
The city, which itself had an economic stake in
the matter as owner of the transit svstem. re-
sponded in 1930 with a tough' ordi~ance that
Ii:'ted uniform taxi fares and restricted the num-
ber of ta..''tis to one for every 2.500 residents (a
number apparently pulled from the air but that
Richard O. Zerbe. Jr.• is a professor irt tlte Graduate
School of Public Affairs. University of W4ShinlfOrt.
artd a consultirtg ecortomist for tl,c Federal Trade
Commission's regiortal office in Seattle. The views
upressed I,ere are Itis own.
lasted for about forty years). Subsequently,
King County, in which Seattle is located, estab-
lished very similar price and entry controls. as
did the Port Authority that operates the Seattle-
Tacoma 	(Sea-Tac) 	airport. 	Later. 	the 	port
moved to an exclusive franchise arrangement.
This regime was ended in 19~ when all
three jurisdictions-the county and port in
May. and the city in 1une-adopted similar
rules allowing open entry and permitting indi-
vidual ta:o firms to change fares as often as
every three months by simply filing new rates.
It was a sweeping act of deregulation intended
to reduce fares, increase jobs in the industry,
and eliminate the administrative burden of taxi
regulation. All this it has done. But it has pro-
duced some adverse consequences as well. and
these have led to a partial reregulation and to
some public demand for further regulation.
It is a case where more careful analvsis of the
market at the beginning might ha\:e avoided
subsequent difficulties.
How the Refonners WOD
Ta."ticb deregulation in the Seattle are:1 re-
sulted from a somewhat unique confluence of
ideological and practiCll factors: 	an a~ti\'ist.
consumer-orierued 	recufatory 	reform 	move-
ment within cit:· government; a forceful. pro-
competiti\'e member of the city council: a series
of requests for fare hikes. brought on by rapidly
IlECiULAnoN. NOVE.\lBEIl/OECE.M8EJlI913 	43

SEATTLE T;,;;AX:.:.;1S~ 	_
:
increZl.<ing gasoline prices, thZlt made continued
reaul:1tion a burden on the cit)' council: and a
po'"orly orgZlnized t.a..~iQb industry.
On the ideologic:U side, the most important
factor was Councilman Randy Revelle's person-
al commitment to decontrol (and his success in
pc:nUOldinll the: Port Authority and King County
to '0 along). He was backed up by economists
from the city's Department of Licensing and
Consumer Afbin, which had respunsibility for
taxi regulation, and from the Federal Trade
Commission's Seattle office. These economists
a!:!reed on the need for a market solution to the
t;xi problem, including at least an end to entry
and minimum-fare regulation. (Some of them
wanted to retain maximum-fare regulation.)
On the practical side, the most important
factor was probably the city council's growing
experience with the inherent economic and po-
litical difficulties of setting rates. In the several
yean before 1979, owners' costs were rising
rapidly, and the council, which had to approve
or deny all requests 	for rate changes, was
swamped with work. It grew unhappy with the
quality and quantity of the financial and operat-
ing data that taxi operators supplied to support
their requests, while the operators complained
about the hassle of compiling it. Rate hearings
became long and bitter. In the end the council.
not sure what rates would be economically or
politically "right," held off on allowing 	in-
creases-and moved toward decontrol.
Whatever the relative importance of differ-
ent factors in bringing about deregulation-in-
terviews with council members and staff sug-
ges,t 	that 	the council's 	dissatisfaction 	was
second in importance only to Revelle's per-
sistence-it is beyond question that the impetus
for reform came mainly from within the city
council. There was never an organized consum-
er movement for dere~ulation. The taxi indus-
try spent several hundred dollars per cab fight-
ing the idea, but failed nonetheless.
What Happened under Deregulation
Elementary economic analysis predicts that the
combination of price and entry restrictions
should lead to higher fZlres, lower ta:<i usage
in general but more intensive use of each cab,
slower responses to customer calls for service,
and 	positive license 	(or medaJlion) 	values.
44 AEI JOUIlNAL ON GOVEIlNMENT AND SOCIETY
Fares should be hieher because restricted entT\'
raises the market:Clearing price and becaus~,
under uniform price controls, re~lators will
tend to set fares above market-c)earing )e\·eIs.
In consequence, the license to operate a ta."tj,
known as a "medallion," wilJ c:arT)' a positive
\'aluc: new entrants will be willing to pay to buy
one. The medallion price should approach the
present \'alue of the stream of future fare in-
come that an owner expects to receive, over and
above the costs of operation. and that can be
attributed to the artificial scarcity of cabs. (See
"New York City Looks at Ta;ti Regulation,"
Perspectives. 	Regular ion, Septembc:rjOcluber
1982.)
Deregulation would. of course. reverse the
effects of regulation. Thus. it could be expected
to attract more cabs into the market, which
would lead to lower fares, higher industry em-
ployment, faster response times, and falling li-
cense values. All this did in fact occur.
• The number of city-licensed cabs rose by
around 21 percent, from 421 just before deregu-
lation to 511 by August 1981. and the number
of taxi companies rose nearly SO percent, from
57 to 85. The number of airport-licensed taxis
increased from about 35 under the previous e."t-
elusive franchise to 263 by December 1979.
(Currently there are about 208 such taxis. even
though the license fee has risen substantially.)
Thus employment in the industry clearly rose,
a significant item to be added to deregulation's
side of the ledger. Moreover, although the avail-
able data are scanty, it appea:-s that response
times are much faster under deregulation.
• The effect on fares is more difficult to
assess, for two reasons: the period was one of
rapid general inflation, and the city council. _
busy planning deregulation, had let rates fall
to abnormally low real levels by 1978. Thus,
from mid-1979 to April 1982, fares of radio-dis-
patched cabs (mainly fleets) increased about 6
percent in nominZlI terms, while fares of air-
port cabs increased by 25 percent and those of
cabs not radio-dispatched (mainly independ-
ents) increased by about 30 percent. However,
several comparisons Sl:ggest that deregulation
helped keep fares down and, indeed, that fares
fell in real terms.
The "average t:L"ti trip" I used for purposes
of comparison was 3.4 miles long al'id was
weighted by type of ta.... i (airpoft. radio, other).
After calculating the-fare for such a trip for
---_.._------..-	.. -.--~-------.,-----~'-:----------~---------
.. 	.. 	.' .

'.
S!A'J"T1.E TA~ IS
..
ilLS Print.
TrllMPOrtatiOn 	RaUo of 	".do of
eostlftCfaa. 	'.r.lncsea 	'er.lnaea
......... 	. .. PrtYat. 	to CPl.
her.1t 	Transportation A.Illtems
(l96i:loo) 	'naea 	(nahon.1I
1.00 	1.00 	100
1.02 	0.98 	0.96
1.03 	1.26 	1.18
1.05 	1.24 	1.12
107 	1.21 	107
1 10 	1 18 	102
1.14 	1.14 	0.94
1.28 	1.22 	100
1.40 	1.11 	0.97
1.51 	1.11 	0.99
1.63 	t.03 	090
1.75 	0.96 	0.83
2.04 	0.82 	0.73
2.04 	1.08 	0.96
2.37 	0.97 	0.89
2.67 	0.98 	0.93
US8
2.26
2.30
2.62
1.00
1.00
1.30
1.30
130
1.30
1.30
1.56
1.56
1.68
1.68
1.68
ed the market-clearing fares. The yearly flow of
income corresponding to that lump sum 	is
a;out $200.000. Divided by the 3.5 million pas-
senger miles that S~attle cabs drove per year.
that amounts to a price premium of six cents
per mile or about 5 percent. Indications are that
the demand elasticity for taxi service is abou.t
-1; that is. a fare increase would result in a
directly proponional reduction in passenger
miles. This means that the reduction in passen-
ger miles owing to regulation would also be
about 5 percent.
In sum. the evidence from 'the transporta-
tion cost index. the consumer price index. and
medallion values suggests that deregulation has
lowered f:1res as expected. It is curious that. be-
fore deregulation. city officials believed fares
were anifici:1lly high. but they apparently did
not believe that licenses had silmificant markt=t
value-which is one reason why tht:y were will-
ing to deregulate. In fact. if license values had
been zero, there would have been no point in
-This index inc:1udes the cosu thae arc most ,ermane
10 t:1xi oper.uiun, ~e for labor.
"The (are reduction under dere:ubtion is somewh:1t
less i( one: combines the er:uuporuuion cost indc:c: with
an inde., for labor casu in ehe service industries. The
amount of &.be ['eCluc:tion depends on the relative
weiahts liven to the two indices: .ivlnS them equ:11
wel;ht YIelds an implied fare reduction of 1 or 2 per-
cent. while 3ssuminl a sm:lJler l:1bor component yields
.a larver reduction (but in no ase larler than 10 per·
cent).
1.91
1.91
2.50
250
2.50
2.50
250
2.98
2.98
3.20
3.20
3.20
COST OF AN AVERAGE TAXI TRIP IN SEATTLE. 1967-81
Taa; '.r.
for 3.c-Ulto Trip
lnoe-ed
In dollars (1967:100)
1967
1968
1969
1970
1971
1972
1913
1974
1975
1976
1977
1978
1979
Jan. ·Jun. 3.20
July·Cec. 4.20
1980 	4.40
1981 	5.00
The dedine in real fares for radio cabs
has been especially dramadc: the largest
firm has not hiked its rates since 1979.
e:1ch of the ye:1rs 196i-8l. I com-
p:1r~d th~ results with both the Bu-
fe:1U of ubor St:1tistics' index of
pri\":u~ tT:1nspon:1tion costs for th~
S~:1ttlc=-E\"en:tt SMSA· 	:1nd 	th~
consum~r price index (sece t:1bl~). 	Ve.r
First. I founc. th:1t u\'er the period
from 	196i to mid-1979. fares for
the a\'er:lge trip were II percent
hight:r th:ln the cost ind~x for pri-
\':1le tr:lnsport:ltion. whereas in th~
two-and-a-half 	ye:1rs 	after 	mid-
19i9. th~\" were :lbout l~vel with
that ind~·x. Th~se fi2Ures SUll2est
th:lt f:lres would h.l\7e been a-bout
11 percent higher Iud controls con-
tinued: a 3.4-mile trip would have
cost SS.5S in 1981 rather than 55.00.
Second. I found that fares aver-
aied 99 percent of the national CPI
in the twelve-and-a-half years be- 	.....: r.... r.," ............. lor _ ""001.
fore deregulation. compared with
just 92 percent afterwards." The decline in real
far~s for radio cabs has been especially dra-
matic: the largest finn has not hiked its rates
since 19i9.
• 	License values also fell. as el'tpected. In
Seattle. the taxi license is attached to the ve-
hicle itself. so that the sale price of a taxi will
have a physical and a license-value component.
I estimated license values (with assistance from
Tim Feeth:lm) by comparing bill-of-sale data
for C:lb s:1Jes with "blue book" values for the
cabs :lnd r:ldius. Tht: difference is the \'alue :1t-
tributed to the license. In the twelve vears be-
fore deregulation. licenses in 5e:lttle fluctuated
in vaJue-dependine on ta:(i costs. fares. the
volu.me of business. and the probability of de-
regul:1tion-from 512.000 to about $2.500. As
deregulation approached. the value fell tow3rd
zeno. 	\
Taking a figure in the middl~-to-IowP:1rt of
this range. $5.000. we can estimate the total
value of Seattle-are:1 cab licenses at :lbout S2
million. This gives us :1noth~r way to estimate
the amount by which the regul:1ted fares exceed-
UCtJUTtON. NOVEMBER/DECEM_D. 1913 45

The Split Taxi Market
derellUl:ltion': fares would alreOld\' hOl\'e b.:en at
the ;ompetitive level. 	.
..
..
SEATTLE TAXIS
called up into the 103din~ areOi one by one.
strictly according to their pl:lce in the line. It is
a system that impedes price competition. be-
cause it puts drivers in a stronger position thaln
customers. A cab that refuses. or is refused by.
For the major submarket of ta"ticalb services. 	a customer ~ocs not to the end of the line b~t
that of J"3dio-dispatched C:lbs. deregulation ful- 	to a holdins :lr~. so that it soon returns to the
filled. lnd continues 	to fulfill. the intended 	head of the line. Moreo\'er, airport customers
,oals of lower fares and better response time. 	are unlikely to dicker with or refuse a cab that
This market. which included about 60 percent 	seems to be assigned to them. especially wht:n
of the oper::lting taxis in 1982. encompasses the 	they do not know local fOires or know lh:lt le~al
major fleets. But deregulation has not been so 	ft1res mOlY vt1ry. or when the~' are on expense "c-
successful in the other 40 percent of the market 	counts and not much concerned aboul costs.
"..·here cabs \\·t1it in a line for passengers. This 	Until changes were made in early 1981. taxis op-
market is made up mostly of independent ope 	er::lting solely at the airport were able to set
erators. While the new entry and pricing free- 	their fares as high as they wished so long as
doms did improve the availability of cabs here. 	they could find enough customers to pay. In
they also produced a number of unexpected 	contrast. cabs that also picked up passengers
problems-and. as a result. widespread con- 	away from the airport. in areas where there is
sumer complaints. 	more price competition. were more reluctant
The troubies at the King Street railroad 	to raise their fares to the level profitable for
station were represen~ative of, though a bit 	airport taxis. As a result. fares were not only
more extreme th.-ln. tnose at cab stands in the 	higher than before. but also varied substantial-
city. Before deregulation. Amtrak awarded the 	Iy: a consumer might. for example. pay S25 for
right to serve the railroad station to a single 	a ride from the airport to downtown Seattle
franchisee. It agreed to switch to open entry. 	and only SJ6 for the return trip. Interestingly.
in 1979. mostly because of pressure from inde- 	consumers have protestea more ahout the fare
pendent operators-who quickly took advan- 	discrepancies than about the am01l7ll of the
tage of the new opportunity. Long taxi lines de- 	fare. which suggests they would pay a premium
veloped. taxis spilled out of the assigned areas. 	to have uniform rates.
some drivers left their cabs (blocking access 	As fares at the airport rose, they attracted
for Amtrak employees and passengers. as well 	new entrants and the taxi lines became mud:
as fellow cabbIes). and some loitered in the sta- 	longer. But since each cab was making fewer
tion aggressively seeking passen~ers. Amtrak 	trips, the drivers were no better off. Many of
personnel attributed these problems almost en- 	them 	refused 	short-haul 	customers 	because
tirely to the independent cabs. Independent 	they had invested so much time getting their
drivers clashed with drivers of the lower-priced 	plalce in line. Also. cab operators say that ten-
"mt1jor" cab fleets. On one occasion independ- 	sion among drivers increased, exacerbated by
ents delayed a major from leaving the station 	instances when customers chose a cab other
with a passenger, on another they ripped off 	than the first in line.
the station wall a direct-line telephone that pas- 	Finally. at the airport. as :It the c:lb lines
sen2crs could use to COlli one of the maiors. 	downtown, the quality of the ride deteriorated.
The'"re were reports of physical intimidatio~. of 	Dri\'ers were less knowledgeable, cabs dirtier.
drivers who lied Olbout the :l\'ailabilitv of bus 	Some deterioJ"3tion in qut1lity results from open
sen'ice. who were slovenl\'. vult!ar. and rude- 	entry: 	new entrants are likely to know less
and so on. Amtrak officiais and- tourist-rel:lted 	about the area. And some is to be expected when
businesses nt1tur::lIl~' bcgan to worry that 0111 this 	prices drop in a deregulated mt1rket. As the Olir-
was making a bad impression on \'isitors to 	line case demonstr::lted, price and entry regula-
the city. 	.-, tion leads to greater competition on the basis
The Sea-TOle airport ht1s had e\'en worse 	of quality. In cab lines. howC\'er, the deteriora-
problems in its cab lines. lt1rgcly because it has 	tion in qut1lity als,? occurs bec;tuse there C:1o be
mostly kept the system for assigning C:lbs it 	little competition onlhe bt1sis'of either quality
used in the days of uniform ft1res. Ta."Cis are 	or price.
46 4£1 JOURSAl. os C;O\'ER.~ME~"T ,,~o SOC1En
-------_...... ~...... ........-.-...........-.......-.-------·----- 	.......... 	• ...,.~_.......i 	~,..- ...
.

, '.
, ---_......-_._ .. --_._--
____________________________________S.;AnL£ TAXIS
I
I
The Response
The: troubk-s in the c:lb Iines-I:lrgc incrc:ls~s
in f:lres; subst:lnti:11 \"ariation in f:lrcs :1mung
u-'tis. much longer t:1xi lin~"S. refus:1ls by drivers
to carry passc:ng~rs short distances. and minor
\'iolence~on\'inccd :m:a officials. hotels. and
the tourist industn' th:1t this m:1rket was not
suited to full-scale decontrol. The dilferent jur-
isdictions respond~d in diffcnmt ways.
E:1rly on. th~ city council :1ddressed the
probl~m :1t cab stands by p:1ssing :1n ordin:ln~e
requiring c:lbbies op~r:lting in the city to pOSt
their f:1res on the outside of the \'ehicles. It is
unclear whether dn\"ers would have done this
anyway. In :lny e,·ent. r.1te-postingseems to
have benefited customers by helping them shop
around among ta.'tis. though the evidence is
anecdotal and difficult to quantify.
More recently. some members of the city
council began to ag'tate for full reregulation of
city cabs. and two hearings were held. The ef-
fort collapsed. however. when the city's lawyers
noted that the U.S. Supreme Court's decision in
Commrll1it), COlllmunications Co.: v. City of
Boulder (1982) "could expose the City to liabili-
ty for antitrust violations for returning to taxi
cab regulation." Pressure to reregulate there-
upon shifted to the state level. where antitrust
immunity operates more strongly.
Amtrak officials, having put up with the
troubles at the station for over three years.
decided in mid-1983 to re-franchise ta:<icabs.
Meantime. some hotels had already moved on
their own to reduce fare uncertain tv for their
guests: they have been guaranteeing -fixed fares
from the hotel to key locat!ons. something they
can do by using only the lower-pnced r.1dio-dis-
patched cabs (in a kind of informal fr.1nchising
arT:1ngement).
The S~:l-T:lc POrt Au:hority. which h:1s re-
sponsibili ty for regulating ili rport ta.'tis. began
considerin2 some chanl!es in late 1980. Amon2
them were -four suggest;d by the Se:1ttle region:
al office of the Feder.11 Tr.1de Commission: de-
velop a way of bringing the cheapest cab to the
front of the line. make more infonnation a"ail-
able to customers. limit entry to the c:lb compa-
nies that "bid" with the lowest fares. or re!!u-
late entry or fees. The port rejected the fi~st
option :lS too costly to implement. the second
:lS having already fail~d in a limited experiment.
and the third for reasons not stated (my guess
is the port fcared :1 hostilc re:lctiO.l from the
dn\·crs).
Tu their almost immediate embarr.1ssment,
port ollici:1ls d~'Cid~d on a version of the fourth
. option: they est:1blished ma:dmum rates. set-
ting the:m equ:11 to the a\'l:r.1ge of rates re!!is-
tcn~d with King Cuunty. It did nott:1ke long-for
a group of enterprising cab owners to torpedo
the: plan by getting one: driver, who did not ex-
pe:ct to oper:1te in King Cuunty. to file a r:1te of
5500 a "drop" and S100 a mile: within the coun-
t\". These ludi~rous numbe:rs r:lise:d the: a\"era!!e:
~atc far abot'·: the Ie:\"d that pre\":1ile:d ev~n
among the highest priced :1irport taxis.
Although the taxi dnvers won round one.
the port struck back within a month. In Febru-
ary 1981. it adopted a m:l.'timum-rate scheme
based not on the aver.1ge nne but on the median
rate, which cannot be so easily manipulated.
That put an effectivf! lid- on fares charged by
c:1bs at the airport. t:nd seems to have elimina-
ted most of the obvious problems. The pnce dif-
ferences 	between 	non-radio-dispatched 	cabs
and r:1dio-dispatched cabs have narrowed. Con-
sumer complaints 	h:1ve also decreased: 	the
city reported in 1982 that it had received only
one complaint in the last half of 1981 as against
twenty-three in the same period of 1980. Cab
lines at the .airport remain long. but the prob-
lem of short-haul customers has been solved by
creating. at the drivers' suggestion. a special
line to serve only customers going shorter dis-
tances. Finally, passengers have become more
familiar 	with 	deregulation. 	which--coupled
with rate-posting-has brought some competi-
tion to the taxistand market.
The port's solution is not ideal from a pure-
ly economic viewpoint. The ma."Cimum rate has
tended to become tlz~ ra.te (as the U.S. Supreme
Court foresaw in the 1951 :L-liefer-Sreu'art case).
Fares ch:irged by taxis at the :1irport are 20 per-
cent or more abo\'e the competitive price as
judged by the fleet price in Seattle. :1nd there
still are large differences between the fare from
the airport (now $23) and the: fare from the:
hotel to the airport (still S16).
A Preferred Direction?
Parti:il rere'gulition has 4l1eviated many of the
problems that arose in the noncompetitive cab-
line m:1rket. Those that remain could be ad-
dressed in a number' of ways. The problem of
IlEGIJ'LATION. NOVE.\18£Jl/DECL\l8£R I9IJ 	47

SEATTLE TAXIS
driver and cab quality can be handled in part
by direct regulation, and Randy Re\·elle. now
the county e:'(ecutive, recently introduced a bill
that tries to do this. Of course, this approach to
quality improvement has its own costs-in in-
spectors, paperwork, and so on. The problems
of fares and lonclinc:s are more tricky, and the
proposed solutions more numerous. They in-
clude setting flat rates to and from the airport
and certain key points, establishing a zone rate
system, imposing a city-wide maximum-fare
schedule. allowing only radio cabs or cabs that
agree to abide by radio COlb rates into the mar-
ket, and refashioning the separate ceiling that
now exists for airport fares.
The problems at the airport and similar
locations have one basic cause. Because
customers find it hard to shop efficiently
for service, taxis can c:ha.rre high fares.
Consequently, along line of.cabs forms .•.	,
Iris the last of these ~ptiom that I would
like to take up here. The problems at the air-
port and similar locations have one basic cause.
Because customers find it hard to shop efficient-
ly for service, taxis can charge high fares. Con-
sequently, a long line of cabs" fOnDS at the
airport-thus driving up costs of operation,
dissipating the monopoly profits, and retrospec-
tively justifying the high level of fares. The Port
Authority has the responsibility for improving
the operation of this market, for the simple rea-
son that it is the one that controls the bottle-
neck of congestion through which taxis com-
pete; it serves its customers poorly if it does
not provide for the best use of its taxi stands.
There are two ma:dmum-fare schemes that
would ease the bottleneck proble'ms. First, of
course, the Port Authority could simply lower
the existing ceiling so as to reduce congestion
by any desired amount, while still letting into
the cab lines all cabs whose fares are not above
that ceiling. Alternatively, it could invite taxis
to "bid," with the lowest fare schedules, for air-
port licenses. Of course, both schemes would-
require port officials to estimate the number of
taxis needed to meet peak demand (the first
implicitly, the second explicitly). This number,
48 UJ JOtnlNAL. ON OQvu,.t.tDlT AND SOCIETY
th~ officials say, is relatively easy to determine
&r.d is probably about ei~hty cabs-far fewer
than are currently working the airport and un-
doubtedly closer to. the competitive number.
In any case, the port could adjust the fare in
the first scheme or the number of cabs in the
second, in order to maintain any desired level
of probability that a customer would find a COlb
available at slow periods. Fares would be lower
on average than they are now, since cab owners
would save in congestion costs what they lost
in lower fares.
It is an interesting question whether such
a plan would violate what might be called the
spirit of competition or the spirit of deregula-
tion. I would argue that it does not. An airport
is no more obliged to give away its taxi bottle-
neck to all comers than a restaurant is obliged
to open its hat-check room to competing hat-
check concessionaires. Precisely because their
businesses an: competitive, restaurant owners
strive to provide for their customers the most
attractive overall package of services.
Conclusion
Deregulation in Seattle varied notably in its
results among different types of taxis and dif-
ferent places. It worked well in the market in
which 	direct 	price 	competition 	is 	possible
(among radio cabs). But in markets where
price competition is difficult (at the airport and
at cab stands downtown), it led to fare discrep-
ancies, higher fares, and other problems that
were a major source of consumer dissatisfac-
tion. In hurting some groups and helping oth-
ers. its overall effect on economic welfare is
indeterminate. Probably the most important
benefit has been additional employment.
The lessons of Seattle taxicab deregulation
are more complicated than the simple one that
deretrulation works or does not work. First, 3
change in regulation-from more to less. just
as from less to more-can have unexpected side
effects. Second, reformers should realize that,
in some markets, even institutional structures
that at first sight appear to restrict entry-such
as Amtrak's franchise operations-are compati-
ble with a competitive (low-cost) solution. To
view the: choice of policies as a black-and-white
dichotomy between .reguration and deregula-
tion is much too simple. 	-
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