Alternative Methods of Taxi Entry Management:
License Caps, Price Rationing, or Performance Standards? 1
Dr. Dan Hara2
Most jurisdictions cap the number of taxicabs permitted to operate. Originally imposed to prevent
excessive competitive entry during contractions in the general economy, caps have disadvantages.
Regulators need technical insight to set the number of taxis correctly, and political will to adjust that
number when demand increases. High prices around the world for taxi permits signal the failure of
regulators to meet these challenges. Permits sell for as a high as $1 million USD in New York and
$490,000 AUD in Melbourne.3 The implied monopoly means artificially high prices to users, and lost
consumer surplus from restricted supply. Low taxi supply also has long-term impacts on public policy to
encourage public transit; to accommodate higher disability rates in an aging population; and to manage
bar closing and drunk driving in entertainment districts. This paper considers whether there are
alternative methods of entry management with fewer disadvantages. Price rationing (the sale or leasing
of taxi licenses at a high fee by a public authority) is compared to traditional license caps. Also
considered is entry management by monitoring standards of service delivery. Analysis includes impacts
on efficiency, government revenues, fairness, and political sustainability.
Taxicabs are a heavily regulated industry.4 Standards commonly are set for taxi drivers, taxis, and taxi
companies. Price and quantity (meter rates and number of taxis) are also commonly regulated.
Regulation of price and quantity goes beyond the regulation of most other service industries. In the
case of restaurants, regulators inspect kitchens for health, but do not commonly set menu prices or limit
the total number of restaurants. Reasons for regulating taxis to this degree include the inability of
customers to adequately assess vehicle and driver quality before entering the vehicle; the efficiency of
having a common price contract and sealed device to monitor distance and time charges; and the lack of
knowledge of taxi brands (sometimes termed colours) by visitors to a city.
This paper focusses on one aspect of taxi regulation: managing entry into the taxi market. Should there
be barriers to entry? Is there a valid policy rationale? Are there alternatives to capping the number of
taxis that are more efficient, fair to existing stakeholders, and politically sustainable?
Five possible regimes for entry limits are reviewed:
1. Open-entry. The default regime in the absence of entry-control. Analysis assumes the choice of
entry management regime is made within the usual framework of taxi regulation. This includes
1
This research paper has been commissioned by the Taxicab Inquiry of the Australian state of Victoria. The
Taxicab Inquiry was established in 2011 to investigate all aspects of the taxi and hire car industry, and to
recommend a set of reforms to the government focused on achieving better outcomes for the travelling public.
2
Hara Associates Incorporated. Ottawa, Canada. www.haraassociates.com/taxi
3
Advertised prices on State of Victoria broker websites as of March 31, 2012.
4
Terminology varies from jurisdiction to jurisdiction, and from continent to continent. In the United Kingdom, a
taxi, or hackney carriage, serves the street hail market, while a private vehicle for hire serves the dispatch market.
In the United States, the majority of cities license taxis to serve both markets. An exception is New York, where
taxis serve the street hail market, while vehicle for hire is a broad term covering the dispatch market and luxury
limousines. Unless otherwise noted, this paper uses the term taxi to refer to vehicles providing on-demand service
in any of the dispatch market, street hail market, or taxi stands.
Page 2 of 23
training, testing, and criminal record checks for drivers, vehicle standards and inspection, and
regulated taximeter rates.
2. Quantity regulation of taxis using a cap on taxi numbers: Setting a cap on the total number of
taxis permitted (the current dominant model).
3. Quantity regulation of taxis using service standards: This is a variant of quota regulation
where the regulator takes advantage of modern technology to monitor service standards
directly from taxi company data systems and management reports. For example, the regulator
might target 80% of dispatch trips to have meter-on within 15 minutes. When the service
standard declines, additional taxi permits are issued to bring service back to desired levels.
4. Entry-price regulation of taxis through permit sales: Regulating the number of taxis indirectly
by setting the sale price for taxi permits high enough to deter excess entry.
5. Entry-price regulation of taxis using annual fees: Regulating the number of taxis indirectly by
setting a high annual fee (equivalent to the lease price of permit), to deter excess entry.
Price-regulation regimes are obvious alternatives to license caps, but have received surprisingly little
attention from taxi regulators. Quite a few jurisdictions do auction taxi permits.5 At this time, the City
of New York plans to raise $1 billion to $2 billion by auctioning 2,000 new permits for street-hail taxis.
However, the auction of licenses takes place within the first regime; the number of permits available is
fixed and the auction is a means of distribution that favours the public purse. Price rationing—the
alternative to setting a price and letting demand determine the quantity—is different. One purpose of
this paper is to explore the price-rationing alternatives to entry control, and to describe the long
experience other jurisdictions have had with them.
The open-entry regime, above, is not the same as total deregulation. The topic of deregulation has been
addressed elsewhere. Notably, Teal and Berglund (1987) document the largely negative results of nine
U.S. cities that deregulated taxis in the late 1970s.6 They found that, contrary to the expectations of
proponents of deregulation, unregulated meter rates rose rather than fell in most cities; as dispatch taxi
firms struggled with reduced market share, the street-hail market was subject to excess entry, and to
long taxi queues and high prices. Expected innovations in service did not materialize either. The
majority of jurisdictions documented by Teal and Berglund reregulated, including reinstituting caps on
the number of taxis permitted.
Organization of Paper
The origins and rationales for capping taxi numbers are discussed in the next section, followed by
analysis of the consequences of poor regulation of caps over time. Alternative entry management
regimes are then reviewed. The paper concludes with a summary table comparing advantages and
disadvantages of each regime.
5
In the United States, the cities of Boston, Chicago, New York, and San Francisco all auction license plates. In the
case of San Francisco, the program is experimental and the maximum value is capped at $250,000. Hara, Dan and
Mallory, Charles (2012) Taxicab Regulation in North America. State of Victoria Taxi Inquiry, 2012.
6
Roger F. Teal and Mary Berglund. The impacts of taxicab regulation in the USA. Journal of Transport Economics
and Policy .Vol. 21, No. 1 (Jan., 1987), pp. 37-56
Page 3 of 23
1
Capping Taxi Numbers: History and Rationale
Capping the number of taxis has been part of taxi regulation for quite a while. In the 1600s both Paris
and London licensed and limited the number of hackneys, horse-drawn carriages offering taxi service.
Dempsey (1996),7 documents how taxi regulation in North America became widespread in the 1920s, as
professional taxicab associations sought to protect themselves from entrants. During the Great
Depression of the 1930s masses of unemployed sought to become taxi drivers, creating significant
problems and causing many cities to cap the total number of taxis permitted. The following 1933
editorial from the Washington Post illustrates civic reaction to the flood of taxis caused by the great
depression:
“Cut throat competition in business of this kind always produces chaos. Drivers are
working as long as sixteen hours per day, in their desperate attempt to eke out a living.
Cabs are allowed to go unrepaired . . .
Together with the rise in the accident rate there has been a sharp decline in the
financial responsibility of taxicab operators. Too frequently the victims of taxicab
accidents must bear the loss because the operator has no resources of his own and no
liability insurance. There is no excuse for a city exposing its peoples to such dangers.”8
The relationship between capping taxi numbers and excess entry is generally recognized. The
Economist, a news magazine generally favouring open markets, had this to say in reviewing recent
regulatory reforms “… On paper, competition should flourish. But low barriers to entry create the risk of
having too many drivers on the road. The number of taxi drivers in New York and Washington, DC, shot
up between 1930 and 1932, as the unemployed sought work during the Depression. Such surges lead to
rules to reduce congestion.”9
The underlying reality is that the taxi business experiences recessions and depressions differently from
other industries. In most industries, supply will tend to contract along with demand during a
recession.10 In the taxi industry, supply expands during a recession, even as demand for taxis shrinks.
The expansion in supply occurs for a number of reasons:
7

Low cost of entry. Entry into the industry requires a vehicle, a driver’s license, and gas. Many
newly unemployed already will have these. Absent regulatory barriers, this combination is
sufficient to begin to cruise for fares. If the entrant wishes to join a dispatch fleet (or meet
regulator vehicle requirements), entry costs are still minor: a meter and a paint job.

It is self-employment. A new taxi driver does not need to be hired by a company. If they wish
to work the street-hail market, they may begin roaming the streets. If they wish to work the
dispatch market, they may retain the services of a dispatch service for a daily or monthly fee.
Dempsey, Richard. Taxi Industry Regulation, Deregulation and Reregulation: the Paradox of Market Failure.
Transportation Law Journal. Vol24:73, 1996. Pg. 73.
8
Taxicab Chaos. Washington Post, Jan. 25, 1933. Via Dempsey Supra
9
A fare fight. The Economist. Feb. 11, 2012. Pg. 76
10
By definition, this is a recession; industries contract production in response to lower demand, laying off workers
in the process.
Page 4 of 23
Taxi operators are usually the paying client of taxi companies, rather than employees. Cash
transactions combined with low ability to supervise mean that most taxi companies are brokers
paid by drivers, rather than employers who pay drivers.

New entrants get an immediate share of business. In taxi stands, the first taxi in line gets the
fare. In the street-hail market, the closest taxi gets the fare. In the dispatch market, taxi drivers
typically book into electronic queues by dispatch zone and take their fares in order. In each
case, the new driver gets a basic share, diluting the income share of others.11
As unemployment rises, individuals with very little experience and with vehicles in marginal condition
turn to the taxi industry as an accessible short-term solution to unemployment. Where they lack
vehicles, they readily can share or lease from others. Even within an otherwise regulated framework,
the negative consequences of excess entry during recessions include:

Low driver income. With expanding supply and fewer customers, the net income of drivers
falls.

Short-term decline in service quality. Service quality declines with the increased participation
by inexperienced drivers and marginal vehicles.

Long-term decline in service quality. Cyclical periods of low income cause experienced drivers
to lose their attachment to the industry and find other occupations. Professionalism declines.
Fewer drivers know the city well, or know where and when to be to meet customer demand
smartly.

Further contraction of taxi demand. The increased proportion of poor trip experiences reduces
customer demand. Alternative means of transport are sought and people change their lifestyle
to be less dependent on taxi service.

Administrative burden. If a regulatory regime continues to enforce driver and vehicle
standards, the enforcement workload increases at the same time as the ability of each driver
and vehicle to support cost-recovery fees diminishes. The increased number of marginal
operators also increases enforcement challenges disproportionately to increased taxi numbers.
Since there are fewer customers to be served than before the recession, there clearly is a
practical incentive for a regulator to limit entry of new taxis—it makes the enforcement problem
more tractable while getting rid of unneeded capacity and satisfying the complaints of longer
term drivers concerning declining income and excessive competition.
In an otherwise well regulated environment, the immediate threats to public safety described in the
Washington Post editorial will not manifest themselves. However, a decline in service quality will be felt
by customers, and there will be a sharp decrease in income for drivers. Taxi drivers usually collect their
income as a residual of revenue minus their gas and fixed expenses. A 20% decline in gross revenue per
taxi can mean an even larger decline in net personal income. Income pressure will cause drivers to drive
longer hours—exacerbating the excess supply from new entrants. This misery will find representation
11
This does not mean that drivers will earn equal shares. Experienced and skilled drivers will do better, because
they will know where and when to be for the best passenger selection, and will have strategies for personal
business development using their cellular phones, and for tipping hotel doorkeepers and dispatchers.
Page 5 of 23
before the regulator and before elected representatives—resulting in the caps on taxi numbers seen in
most jurisdictions today.
Entry Limits and Dispatch Markets
Some authors have argued that the rationale for entry limits does not apply to the dispatch taxi market.
Schaller (2007) presents the case that open entry (i.e. no cap on licenses) in the dispatch market is viable
if there are entry controls in the street-hail and taxi stand markets.12 Examples cited by Schaller focus
on dispatch companies operating where there are caps placed on airport taxi stands—a key stand
market in most cities.
Such arguments are beside the point. Open-entry, as opposed to complete deregulation, is viable for
both dispatch and street-hail markets so long as the economy is reasonably stable. Learning from failed
U.S. experiences in deregulating taxis in the 1970s, the American cities of Minneapolis and Indianapolis
removed caps on taxi permits while retaining meter rate regulation and other requirements.13 The city
of Washington, D.C. has also been an open entry regulated environment for many decades.
The viability of open entry does not mean that the industry is not vulnerable to excess entry during
recessions. Rather, excess entry is a known disadvantage of this regime choice. The substantive
question is whether the dispatch market is vulnerable to the same excess entry in recessions as the
street-hail and taxi stand markets.
Certainly, the increased number of drivers and vehicles desiring to enter the taxi market will be a
common condition for both the street-hail and dispatch markets. Since most dispatch firms are
organized as brokers receiving fees from taxis, there is an immediate incentive to take on as many as can
pay. As Schaller acknowledges “In an open-entry system, companies have the incentive to put as many
cabs on the street as there are drivers willing to pay lease fees and thus fail to act as a gateway control
to entry.”
Despite this incentive, the case might be made that taxi companies can chose to limit their intake of
taxis, to set high standards, and to market themselves to customers as a quality assured brand. Were
this the case, we would expect that companies employing this strategy would come to dominate the
market, achieving the customer volume and trip density necessary to sustain an efficient premium
dispatch service. In this case, barriers to entry would not be needed since the principal providers would
self-regulate.
Unfortunately, the evidence indicates that such a strategy is not dominant. In the U.S. deregulation
experience documented by Teal and Berglund, the dispatch market suffered in parallel to the street-hail
and stand markets. Well-established dispatch companies did tend to pursue a quality strategy, raising
prices as well. But such companies also suffered loss of market share from new firms entering the open
market, and from drivers abandoning the street-hail market that was rendered unprofitable due to
excess entry. The loss of market share is material because it also affects unit costs of operation. As the
geographic density of calls and supported trips decline with volume, the average distance between a
free taxi and the dispatch address increases. Thus, the rising prices reported for reputable dispatch
firms are at least partially absorbed by increased costs.
12
13
Schaller, Bruce. Entry Controls in Taxi Regulation. Transport Policy 14(2007) 490-560.
Hara and Mallory (2012). Supra.
Page 6 of 23
In a regulated environment with a cap on meter rates, dispatch firms would be even more challenged by
excess entry than with the pricing freedom of the deregulation cases reported by Teal and Berglund. The
strategy of raising prices to finance preserved quality in the face of lost market share to new dispatch
firms may not be available.
Finally, modern dispatch and telecommunication technology has greatly lowered the barriers to entry by
new dispatch firms since the 1970s. A new taxi firm does not need to acquire its own dispatch centre—
it can contract out the service to other firms (a practice common in Australia). From a technical
perspective, Global Positioning Systems, computer dispatch, and automated call answering mean that
the dispatch service need not be in the same city or even country. Lower barriers to entry mean that
excess supply of taxis can find its way into the dispatch market more quickly through new taxi
companies.
In short, excess entry of new taxis during a recession is a rising tide that lifts boats in both the street-hail
and dispatch markets. Barriers to entry at the firm level are also low, so that requiring entry at the firm
level, rather than at the individual taxi level, is ineffective in deterring excess entry.
Driver Sensitivity to Oversupply
One reason the industry is sensitive to over-supply issues is that, even in good times, over-supply
already exists as a feature of the system. In a well-functioning system, we expect a taxi to be present at
a taxi stand when a customer arrives. The intention is that taxis wait for customers, rather than
customers wait for taxis. Similarly, we expect a dispatch taxi to be available when a customer calls
(except perhaps bar closing hour or the Friday before Christmas). A wise regulator will set meter rates
higher than the market clearing level to ensure that there is excess supply to cover average daily peaks
plus random variations in taxi demand. This tendency, combined with off-peak periods, means a taxi
driver’s life is often one of waiting, queuing either electronically or at a taxi stand. This creates a large
overhead cost of dead time, and a keen sensitivity to minimizing that time as a key feature of being a
successful cab.
Congestion Rationale
Other rationales for entry limits include externalities for pollution and congestion. Since taxis and public
transit together form a substitute package for private vehicle ownership, it is difficult to accept the
significance of pollution arguments. However, the congestion argument has merits in cities with highdensity downtown cores.
New York City is a good example. A glance to the street below from a tall Manhattan building reveals
that a high proportion of the vehicles at stoplights are New York yellow cabs. An increase in the number
of these vehicles would contribute materially to downtown congestion. New York famously limits the
number of street-hail yellow taxis through its medallion system, while simultaneously administering an
open-entry market in dispatch taxis. It is the medallions of these yellow taxis that have been auctioned
for up to $ 1 million USD.
Page 7 of 23
Impact of Lagged Adjustment of Taxicab Permit Caps to Growth in Taxi Demand
A risk of capped numbers of taxis is that the regulator often fails to increase the number of taxis to accommodate
growth in taxi demand. The negative impacts can be shown in the lease market for taxi permits. In year one,
below, the regulator sets a cap of Q1 on the number of taxis. Initially the cap is set at a reasonable level to meet
demand while deterring excess entry. Because the permits are limited, individual drivers and others are willing to
pay a small price (L1) for leasing. The orange square represents the revenues to permit holders, which ultimately
are paid by passengers. The green triangle represents the implied consumer surplus, the value that consumers
place on taxi service over and above the amount they pay.
In year five, demand has expanded to D5 but the regulator has left taxis at Q1. The increased demand for the fixed
supply means taxis are very busy and the lease price is bid up to L5. Revenue to permit holders (the orange box)
expands at passengers’ expense. In addition to this transfer from passengers, there is the lost value of suppressed
taxi service. Had the regulator adjusted the number of permits proportionate to demand (Q 5), the lease price
would have remained at L1. The value of suppressed taxi rides is the blue area, termed the deadweight loss.
$ Lease
Taxicab
Permit
$ Lease
Taxicab
Permit
Year One
L5
Passenger
Surplus
L1
Year Five
Passenger
Surplus
.
(Inflated
Lease
Price)
.
Producer
DW
Loss
D1
Producer
Q1
D1
Quantity of
Taxicabs
Q1
D5
Q5
Quantity of
Taxicabs
Box 1
2
High Permit Values: The Consequences of Poor Management of License Caps
High Permit Values & Regulatory Capture
Despite its valid policy origins, capping taxi numbers has a poor reputation. As cities grow, the cap is
rarely increased fast enough to keep pace with demand. The limited taxis become busier and more
profitable, creating a market value for the rights to the vehicle permit itself (termed plate, medallion,
license, or roof light depending on the jurisdiction). While each taxi may be busier and more efficient in
the technical sense, this is not a social gain. Either customers must wait longer for these busy taxis or,
the regulator must let meter rates rise to reduce demand to available capacity. In either case, the
Page 8 of 23
market for taxi services is constrained below the wealth maximizing level for the jurisdiction, and
customers end up with poorer or more expensive service. Net losses from lagged adjustment of taxi
numbers is illustrated in Box 1, using a supply/demand diagram.14
Over time, it is typical for taxi permit values to greatly exceed what would be necessary to deter excess
entry into the taxi business by the unemployed. Taxi permits in Sydney and Melbourne reportedly trade
at over $300,000 AUD, and $500,000 AUD respectively.15 A sampling of North American permit values
ranges from $USD 20,000 for Houston to $USD 1,000,000 for an unrestricted yellow cab in New York
(Table 1).
In addition to indicating that passengers are paying too much for taxi fares, high permit values are a
visible signal of deeper waste. As with any monopoly, constrained output means the loss of consumer
surplus—the difference between the value consumers would have placed on the forgone output and the
cost of production.
The shared experience of high permit values suggests that capped license regimes are especially
vulnerable to regulatory capture. Capture is said to occur when the regulator begins to see the world
from the point of view of the regulated industry, and starts to serve the industry’s interest rather than
the shared interest of customers, industry, and the general public. The taxi industry may be especially
vulnerable to capture since the vested interest of permit holders is strong, whereas it is rare for
individual taxi passengers to feel strongly enough to appear at regulatory hearings. In a 2007 report, the
Organization for Economic Cooperation and Development (OECD) concluded:
Restrictions on entry to the taxi industry constitute an unjustified restriction on competition.
Regulatory capture frequently means that these restrictions lead to large transfers from
consumers to producers, economic distortions, and associated deadweight losses. 16
This concern led to the inclusion of taxi industry liberalization in the 2011 reorganization measures
imposed on Greece by the European Union. The measures were adopted, despite street blockades by
protesting taxi drivers.
Economic and Social Losses Outside the Taxi Industry
Passenger transportation is required by most human endeavours. When taxis are not conveniently
available people must, in the short run, choose other transportation or give up on the activity. In the
long run, general availability of taxis affects the decision of whether or not to own a personal vehicle.
The majority of people in developed nations will own a private vehicle at some point in their lives, but
the age at which to start and when to end, is influenced by the alternatives available. In this sense,
public transit and taxis are complementary goods—a package of services that is the alternative to
private transportation. When taxi supply is unreasonably restricted, the resulting short run and long run
decisions by individuals will have economic and social impacts beyond the industry itself. Areas of
particular concern include:
14
For simplicity, the Marshallian concept of net surplus is illustrated. Empirical application of diagrams in this
paper should consider the appropriate income-compensated demand curve.
15
OECD. Policy Roundtables; Taxi Services: Competition and Regulation. 2007.
16
Ibid. Pg. 7
Page 9 of 23
Table 1: Examples of Taxi Permit Values in the United States and Canada*
Jurisdiction
Boston, U.S.
Chicago, U.S.
Edmonton, Canada
Houston, U.S.
Mississauga, Canada
Montreal, Canada
New York, U.S.
Approximate
Number of Taxis
1,825
6,900
1,220
2,270
515
Method of Managing Entry
/ Licensing Regime
Fixed cap
Fixed cap
Fixed cap
Formula. Average of
population growth and
airport taxi trips.
Formula. Weighted average
of business indicators.
Fixed cap
$650,000
(owner-driver) $1M
(company)
35,350
Dispatch and prearranged
only.
Not limited
Not applicable
Regina, Canada
125 (excluding seasonal)
Formula. Per capita, but
not in use.
Fixed cap
1,585
Fixed cap
Toronto, Canada
Winnipeg, Canada
Vancouver, Canada.
$180,000 to $200,000
13,237
Street-hail taxis
1,166
Seattle, U.S.
$20,000 to $40,000
4,595
Ottawa, Canada
San Francisco, U.S.
If Transferable,
Market Value of Taxi
Permit
($USD or $CAD)
$400,000
$275,000-$300,000
$100,000
850 Taxis
260 Dispatch only
1400 (owner-driver)
3,552 (unrestricted)
501
589
$250,000
$150,000 to $180,000
$250,000
(administered
maximum)
Fixed Cap
$113,000
Fixed cap
No longer issued
Fixed cap
Fixed cap
No
$160,000
$400,000
$400,000 to $500,000
*Various years 2010 to 2012. Sources:
Hara, Dan and Mallory, Charles. Taxicab Regulation In North America. State of Victoria Taxi Inquiry, 2012.
Hara Associates. Taxi Supply Demand Ratio for Calgary: Phase I. City of Calgary. 2010.

Reduced public transit passenger volumes. Cities commonly promote increased use of public
transit over private vehicles. In addition to the economies of scale available in public transit,
there is the desire to reduce traffic congestion, associated infrastructure expense to handle
peak-load traffic, pollution, and greenhouse gas emissions. Because taxis are a complementary
good, a lack of availability of taxis will mean less use of public transit. In addition to long run
impact on vehicle ownership, the willingness of vehicle owners to commute by bus is partly
dependent on being able to get a taxi quickly when needed (called to the school for kids,
medical appointment, etc.).

Accommodating growing numbers of persons with disabilities in an aging population. One of
the groups most affected by taxi shortages is people with disabilities, both those requiring
Page 10 of 23
wheel chair accessible transit, and those with more general transportation disabilities (e.g.
limited walking distances). While public transit systems may provide special services for this
population, budgetary constraints often require passengers to book days in advance, and to
allow large windows of time for scheduled arrival of multi-passenger vehicles. On-demand taxi
service is important alternative for this group. As developed nations face an aging population,
the number of those with disabilities also increases, thereby increasing demand for both regular
and wheelchair accessible taxis. Taxi shortages become an important constraint for this group,
exacerbated by the appetite by public transit authorities for hiring taxis as a cost-effective
means of providing regular service to persons with disabilities, which in turn removes vehicles
from the on-demand market. As the population of persons with disabilities grows, this group is
also finding greater political voice.

Reviving downtown cores and reducing driving under the influence of alcohol. Over the past
decades, sentiment has grown against driving under the influence of alcohol. More people
desire to take taxis for an evening out, whether it is to a bar or just to dinner. Taxi shortages are
an important constraint. Witnessing bar closing in a modern metropolis, one watches crowds of
patrons exit establishments and melt away into parking lots—a clear and unfortunate result of a
shortage of taxis. In addition to these crowds, there are those who chose to stay home, or visit
establishments closer to home. The latter have an impact on another urban policy—the revival
of downtown cores. Cities often rely on entertainment districts to sustain or revive their
downtown cores. If patrons are expected to make the trip from outside the core to the
downtown nightlife, taxi availability is an important strategic requirement.
How large are the losses? Price Elasticity Estimates
How much lost taxi business volume is represented by the high permit values we observe? This
question determines whether the issue is minor, or involves major loses of welfare in the dimensions
discussed above. If the regulator were to remove the cap on taxi numbers, while continuing to provide
a framework of meter rates and quality standards, would the increase in taxi usage be 10%, 20%, or
more than 100%?
One approach to estimating the degree of suppressed taxi demand requires just the following
information:

Gross revenue per taxi.

Lease rate paid for permit rights. Where the regulator allows taxi permits to be traded and
leased, some permit holders will choose to lease the permit to others rather than use or sell
them. There will be a lease market where such permit holders lease to drivers who have
vehicle, equipment, and dispatch service, but require one of the scarce permits to operate
legally. Where allowed, this is a common industry practice, and there will be a prevailing price
for the monthly lease of a taxi permit, separate from the lease of a vehicle, or the fees paid to a
taxi company for dispatch service. This income stream is what supports the market value of the
permit itself. In Melbourne, as of March 2012, taxi permit leases are advertised publicly for
between $2,900 and $2,950 per month, while the actual taxi permit (termed plate) is advertised
for as high as $490,000. In Sydney, lease rates are reported at annual rate of $29,000, with
unrestricted plate values in the neighbourhood of $450,000. Since this lease rate is for the
Page 11 of 23
license, rather than for any physical input required to provide taxi service, the lease payment is
also a measure of the monopoly profit being taken out of the system due to the cap on taxi
licenses.17 The widespread existence of lease rates on permits can be an embarrassment to
regulators. Many forbid explicit leasing, in which case the permit may be bundled with the lease
of the vehicle, but still be present implicitly. Many U.S. cities go the additional step of trying to
regulate lease rates (inclusive of the vehicle) in an attempt to improve driver incomes.

Price sensitivity of demand. Price sensitivity is normally expressed in proportionate terms as
price elasticity, the percentage change in quantity from a 1% change in price. If price elasticity is
minus one, then a 10% drop in taxi fares would produce a 10% increase in taxi use. If price
elasticity is minus five, then a 10% drop in taxi fares will produce a 50% increase in taxi use.
Using this method, the percentage of suppressed taxi demand may be expressed as:
%Suppressed Demand = - (%Taxi Fare Inflated above Cost) × (Price Elasticity of Taxi Demand)
= - ($Permit Lease/$Total Revenue) × (Price Elasticity of Taxi Demand)
Consider a practical example.18 The hypothetical city of Midville is busy enough that taxis typically are
double shifted. The regulator has long ago capped the number of taxis, and allows taxi permits to be
transferred or leased independent of the vehicle. Over time, the value of permits has climbed to
$120,000. The monthly lease rate for a permit alone is $1,000, or $12,000 per year.19 The average taxi
makes 35 trips over both shifts, at an average fare of $14 per trip including tip. Allowing for downtime,
the taxi operates 310 days per year, for gross annual revenue of approximately $152,000. The
$12,000/year lease payments represents 8% of the gross revenue. Thus, we may say that for Midville,
the actual costs of taxi operation, including the return paid to drivers, is 8% less than the meter rate
being charged, including allowance for tipping. This suggests that meter rates could be 8% lower in the
absence of the need to reduce demand to match the cap on available taxis. If the price elasticity of taxi
demand is minus two—an average value for price elasticities—then an 8% drop in taxi fares would
produce a 16% increase in taxi business volume. For hypothetical Midville, this is the suppressed taxi
demand.
Estimates of the price elasticity of demand for taxis are consistently around unity (-1.0), rather than the
value of minus two in our example. Teal and Berglund (1987) surveyed taxi demand elasticity estimates
and reported an average value of between -1.0 and -0.8.20 In a cross-sectional estimate derived from
17
More precisely, the lease rate will be bid up by drivers until the price leaves them with a net income equivalent
to their next best employment opportunity. Thus the lease rate will be equal to gross-revenue minus the costs of
operation minus the opportunity cost of a competitive alternative wage for taxi drivers. By definition, this is the
excess profit above normal rates of return being earned as monopoly profit in the taxi industry.
18
The example is a composite consistent with confidential financial information collected for a number of cities.
19
This implies a 10% annual rate of return on the lease. The relationship between revenues and lease rates is
governed by the perceived risk of regime change (such as deregulation), and the usual factors governing the
market value of any security. The latter includes expected future growth in lease rates, and the covariance of lease
rates with the general market for securities (often termed market risk or beta coefficient). Because the taxi
industry is highly vulnerable to recessions, the market risk is high. The high market risk combined with the risk of
regime change typically means the expected rate of return via lease payments is significantly higher for
government bonds or other secure fixed instruments.
20
Supra. Page 50.
Page 12 of 23
Canadian cities, Hara (1990)21 found a price elasticity of demand of -1.1. Unity was also estimated by
Teal and Mackey (1992) using data from four cities in the U.K.2223
With price elasticity at unity, the volume of suppressed taxi demand and associated welfare losses is
proportionate to the percentage of total taxi revenue accounted for by lease fees paid for taxi permits.
The portion of revenues going to lease fees will vary from jurisdiction to jurisdiction. Lease rates tend to
be higher in more urbanized jurisdictions; however, revenues per taxi also tend to be higher. In general,
the high levels of observed prices for taxi permits imply high lease rates, and suggest the size of
suppressed demand is nontrivial.
Suppressed Taxi Demand May be Larger in the Long Run
Other data suggests that suppressed taxi demand in capped regimes may be significantly larger than
indicated by price-elasticity estimates. Price alone does not capture the full impact of supply restrictions
on taxi demand. Poor service and long wait times can also be a deterrent to taxi use. We may also
expect that the impacts of taxi availability on vehicle ownership decisions, and decisions on where and
how to commute, may take some time to reveal themselves.
An extreme example of suppressed demand is seen in Ireland’s 2010 conversion of Irish taxis to open
entry. As a result of a court decision, caps on the issue of taxi licenses were removed and taxi numbers
more than tripled within a few years.24 Prior to deregulation, Irish taxi permits traded for £90,000, a
substantial sum but not one that would in itself indicate such a high suppressed demand. In Ireland’s
case, the issue may also have been substantial wait times during peak periods prior to deregulation.25
Similarly, New Zealand experienced a doubling of taxis overall, and a tripling in its metropolitan areas,
following removal of license caps in 1989.26
Another approach to assessing suppressed taxi demand is to compare per capita taxi numbers between
cities. Vehicle ownership is a life-cycle decision that is seldom reversed once taken, so that it may take
generations for the population to fully adapt to widespread taxi availability. Relaxed supply conditions
also affect the ability of the industry to meet peak-load conditions. In the case of full-open entry, parttime taxis become more feasible. Thus, the potential market for taxis may be seen only in cities that
have had caps removed the longest.
Figure 1, shows per capita taxis reproduced from a survey of U.S. and Canadian jurisdictions.27 Those in
orange have no license caps. Indianapolis removed caps in 1994, and Minneapolis removed caps in
stages, between 2006 and 2011. Phoenix is a slightly different case. It is one of the U.S. cities that
21
Hara, Dan. Evaluation of Taxi and Limousine Service Demand and Economic Model for Rate Structure. Hickling
Corporation. 1990, for the Regional Municipality of Ottawa-Carleton, Canada.
22
Toner, J.P. and P.J. Mackie. “The economics of taxicab regulation: a welfare assessment”, paper presented to
the Sixth World Conference on Transport Research, Lyon, 1992.
23
It should be noted that price elasticity of unity is also the point on a demand curve at which total revenue from
consumers is maximized. The common observation of price elasticities of unity may speak more to regulatory
capture than to the price sensitivity of taxi demand across the entire range of feasible prices.
24
OECD (2007). Supra
25
Daily, Jennifer. Taxi Deregulation Three Years On. Student Economic Review, Vol. 18. 2004
26
OECD (2007). Supra
27
Hara and Mallory (2012). Supra.
Page 13 of 23
experimented with full deregulation, and has remained deregulated since 1982. In addition to removing
caps, most other forms of regulation were removed. The State of Arizona, which regulates Phoenix, only
recently reinstated required criminal record checks for drivers. Most obvious in Figure 1 is the much
larger per capita taxi use in cities that have longstanding open entry regimes. New York, although famed
for its license caps in the street-hail market, has open entry in the dispatch market. Combining taxis in
both market segments yields a per capita taxi use triple many other cities. New York’s high density
development in Manhattan (with correspondingly high parking rates and low vehicle ownership) might
be argued to be exceptional. However, Washington, D.C. lacks New York’s density but is a longstanding
open-entry city in both the dispatch and street-hail markets. Washington’s high taxis per capita occurs
despite vigorous competition from surrounding jurisdictions for cross-border taxi commuting by federal
employees.
3
Alternative Regime: Regulation of Taxi Numbers through Service Standards
An alternative to periodic revision of taxi caps is adoption of an objective rule linked directly to a
measure of the adequacy of taxi supply. With the ubiquity of computer dispatch systems, such
measures are now possible.
Computer dispatch systems are an essential feature of modern taxi companies. Through global
positioning systems, a company is able to know each vehicle’s location and whether its meter is on,
thereby permitting efficient dispatch to the closest unassigned vehicle. The systems also give each
driver information on where the system is busiest so that they can position themselves to receive calls.
The result is a fascinating amalgam of computer efficiency coupled with the intelligence of experienced
drivers—a system that learns and adapts to a city’s needs. Computerized dispatch also provides tools
for taxi companies to manage their fleets. Calls in trouble can be flagged immediately for supervisor
Page 14 of 23
attention, and computer records can be used to generate management reports summarizing
performance in a number of dimensions, or recalling records of individual trips.
With all this potential, it is natural to ask how the taxi regulator should use the information to meet its
obligations. For example, it is now feasible to measure service quality in terms of average response time
to dispatched calls. In the old paper- and radio-based systems, response time was largely a matter of
conjecture. To monitor response times, the regulator’s inspection staff had to make sample calls for
taxis in sufficient quantity to be statistically significant. Few jurisdictions undertook this expense. Now,
the response time of each dispatched call is knowable. The time from the assignment of the call to
when the meter is turned on is easily measured. Alternatively, one can measure from time of dispatch
to arrival at the front door (as reported by GPS).
To use this capability, the regulator might set a standard that 90% of dispatch calls should arrive at the
customers’ door within 15 minutes. When industry performance falls below this mark, more permits
would be issued until the service target is restored. Separate monitoring could be conducted to ensure
that standards were met for wheelchair accessible taxis. A target for telephone service, in terms of time
to answer and dropped calls, might also be established. For the street-hail market, the performance
indicator might be the percentage of time a meter is on. When average meter-on time exceeds a
threshold typical for a city, the implication is that capacity is strained and customers are finding it
difficult to hail a taxi or find one at a taxi stand. More permits would be released until the meter
utilization rate fell to a level indicative of sufficient supply.
Table 2 provides a sample menu of possible monitoring items adapted from a technological study
undertaken for the City of Calgary, Canada. It includes estimated reporting costs to companies where
the capacity was not already present (costs in $CAD, 2010). Telephone response time monitoring costs
depend on the capabilities of current switches. Ironically, because many new telephone switches are
built to be inexpensive, they lack features that were standard on older systems.
Although much of this data is generated routinely by companies for their own purposes, few regulators
appear to collect it on a regular basis. A survey of large Canadian and selected U.S. cities from the same
2010 work found that only one collected service quality and performance information regularly. Among
the conditions of its taxi franchise system, Los Angeles monitors the percentage of telephone calls not
answered within two minutes, and trips not served within 15 minutes. It has been doing this for more
than twenty years. Most regulators reported no regular data collection, but work with the industry on
ad hoc needs for reports and analysis. Where empowering legislation for data collection existed, it was
often not exercised.
New Trends in Data Collection
The long-standing Los Angeles example indicates that political will rather than technological capacity
that has limited the application of performance monitoring regimes. However, there is a new trend in
taxi technology that offers an opportunity for regulators to improve reporting. Boston and New York
have led the way in North America in introducing a higher technology experience for passengers.
Page 15 of 23
Table 2: Possible Performance Standards for Managing Taxi Numbers and Service Quality
Regulator’s
Monitoring
Objective
Metric
Example Report Items
Trip volume
Monthly Number of Trips:
 Total trips
 Trips dispatched
 Trips hailed
Monthly % of trips from
entering system to
meter-on:
% 4:59 minutes or less
% 5:00 to 9:59 minutes
% 10:00 to 14:59 minutes
% 15:00 to 19:59 minutes
% 20:00 + minutes
 Average time to
answer.
 % of calls exceeding 2
minutes to answer
 Occurrences and
duration of ring busy
Average % of time meter
is on for active taxis.
For preselected weekend
each month (Thurs.0:00
am to Sunday 24:00)
Hourly count:
# Vehicles on duty
# Vehicles booked into
dispatch zone.
# Vehicles meter-on
Hourly, same format as
above for preselected
weekend.
Dispatch
response time
Adequacy of
Total Supply to
Meet Demand
&
Service Quality
Telephone
response time
% of meter-on
taxi time.
Vehicle counts
Adequacy of
Peak Time
Supply
&
Service Quality
Dispatch
response time
Availability by
dispatch zone
Taxis and/or customers
waiting in dispatch queue
by dispatch zone.
Telephone
response time
Hourly, same format as
above for preselected
weekend
Cost Implications for Companies with Modern
Dispatch System ($CAD)*
Minor. Monthly trip volumes part of current
management information reports.
Minor. Part of current management
information reports.
Medium ($10K to $20K) to major ($200K $500K) in short run. Minor in long run, if
incorporated internet protocol systems. Worst
case– requires replacement of telephone switch
and system.
Minor to medium ($10K to $20K).
Medium ($10K to $20K). Usually part of live
system reports available on screen, but may
require, not be retained by system. . Regular
reporting would call for programming timed
data capture.
Medium ($10K to $20K). Standard reports may
only provide daily averages. Regular reporting
would require programming a new
management report
Medium ($10K to $20K). Snapshots are usually
generated live to be visible to taxi drivers.
Retention may require a programming a new
management report. In addition, taxi
companies do not use the same dispatch zone
structure.
Now: Medium to Major now ($10K to $500K)
Later: Minor. See above for monthly telephone
response time.
* Source: Hara Associates. Taxi Supply Demand Ratio for the City of Calgary; Phase II Measurable Service Standards. City of
Calgary 2010.
**Cost estimates are indicative only.
Using a monitor to display the taxi’s real-time progress on a city map, to run advertisements, and
provide information, as well as enabling passengers to swipe their own credit card, has revolutionized
the backseat experience. Regulators in both cities also now require close to real-time reporting of data
on each taxi trip. This information can be used for something as simple as locating a taxi with lost items,
to monitoring service quality and geographic coverage. A portion of the costs of these new systems is
recovered from advertising. Full electronic reporting of vehicle trips also enables other licensing
innovations, such as restricted licenses to serve specified areas or times of day.
Page 16 of 23
Advantages and Disadvantages of a Performance Monitoring Regime
A performance monitoring rule is a different conceptual approach than caps on permits but, in
implementation, it is a variation of permit caps. The regulator responds to poor service data by
expanding the cap. In this, it shares the weakness of license caps in that regular application requires
political will in an area noteworthy for regulatory capture.
The advantage is that it ties the regulator to an objective rule that is directly linked to the adequacy of
supply in the taxi industry. In contrast, rules like per capita taxi ratios often are not implemented, even
when required by law, because they require hearings to determine if industry conditions truly justify
increasing (or decreasing) the number of taxis.
4
Alternative Regime: Entry Price Regulation
Given the demonstrated disadvantages of the traditional cap on taxi numbers, is there an alternative
approach to entry management that might be more effective? One such approach is to replace
traditional quantity based restrictions with price based restrictions.
Placing a cap on taxi licensing is a quantity-based restriction. It can be shown that for any quantity
restriction, there is an equivalent pricing policy that will achieve the same result in terms of taxis and
service level. For example, consider a traditional quantity based restriction of the hypothetical Midville.
If Midville has a cap of 2,000 taxis, then there will be a going market rate for the lease of the taxi permit
of, say, $L per year. The entry price-regulation alternative for Midville is for the regulator to set an
annual licensing fee of the same $L, but with no explicit cap on taxi numbers. The result will be the
same number of taxis (2,000 in this case). In the open market there is a relationship between the
number of taxis and the lease price. For any quantity of taxis, there is a corresponding market clearing
lease price on the permit. Any given price-quantity pair can be accessed either by capping the quantity
and letting the price adjust, or by fixing the lease price and letting the quantity adjust. The traditional
method is to fix the quantity, however the same result can be achieved by fixing the lease-price and
letting the quantity of taxis adjust to match. Box 2 illustrates this principle.
Long Run Advantages: Escaping Regulatory Capture
One of the attractions of entry-price regulation is that it removes the great danger of taxi caps lagging
behind growth in taxi demand. Once the price barrier is set, quantity adjusts automatically. As demand
expands, the usual market competition causes the number of new taxis and/or taxi companies to rise to
meet that demand. Those who can find the business to justify an additional taxi are free to pay the fee
and have that taxi.
The automatic adjustment of taxi numbers reduces the likelihood of regulatory capture (at least with
respect to taxi numbers). In the traditional quantity capped regime, initiative is required to change the
number of taxis. Under entry-price regulation, the only initiative required is for the new taxi operator
to go the regulator’s counter and pay the entry fee.
Page 17 of 23
Automatic Market Adjustment of Taxi Numbers under Entry-Price Regulation
A virtue of entry-price regulation is that if the regulator does nothing, market forces will expand the number of
taxis to meet any increase in taxi user demand. This can be shown in the lease market for taxi permits. In year
one, the regulator establishes an annual license fee high enough to deter entry, but not so high as to unduly
restrict supply. In effect, the regulator is leasing permits at price L1. The area of the purple square is revenues to
the public purse. When demand expands to D5 in year five, taxi providers take out more permits to meet the
demand they experience. Taxi supply expands to Q5. Revenues to the public purse expand, and the lease price
remains at the nominal level originally set by the regulator.
Year One
$ Lease
Taxicab
Permit
.
(Optimal
L5
D1
Public Purse
Barrier to
Entry)
Passenger
Surplus
.
Passenger
Surplus
L1
Year Five
$ Lease
Taxicab
Permit
Q1
D1
Public Purse
Q1
Quantity of
Taxicabs
D5
Q5
Quantity of
Taxicabs
Compare this result to how a regime with capped permits might experience an increase in taxi demand (diagram
below from Text Box 1). In year five, entry-price regulation shows a larger number of taxis, larger passenger
surplus, and there is no deadweight loss.
$ Lease
Taxicab
Permit
$ Lease
Taxicab
Permit
Year One
L5
Passenger
Surplus
L1
Passenger
Surplus
.
(Inflate
Lease
d
Price)
.
Producer
DW
Loss
D1
Producer
Q1
Box 2
Year Five
D1
Quantity of
Taxicabs
Q1
D5
Q5
Quantity of
Taxicabs
Page 18 of 23
Additional advantages of entry-price regulation:

Switching is possible in mature regimes. The switch from quantity- to price-based restriction
can occur at any time. Even where permit values have been allowed to climb to an
unreasonable level, a switch to open entry combined with a license fee equal to current annual
permit leases will prevent further deterioration, and ensure that future increases in taxi demand
are met automatically with increased service provision from new permits requested by the
industry.

Compromises can protect incumbent interests. Holders of existing permits can be
grandfathered into a price-regulated permit regime, and continue to collect their lease rents.
The difference is that lease values will not climb above the alternative offered by the regulator
of new permits for the entry-limiting annual fee. Old permit holders will retain their income
stream, although they may lose any speculative value of their permits embodying future
expectations of continued regulatory capture.

Gain to public purse. The revenue from the new higher priced taxi permits goes to the public
purse.

Improved competition and innovation. New taxi companies can enter the market without
having to negotiate buyouts of existing firms. Arguably, it takes a fleet of at least 100 taxis to
provide efficient dispatch service to a city of reasonable size. Under entry-price regulation, a
new entrant is free to enter at scale, risking the entry price in the belief that they have a better
service or can serve new submarkets. Under capped taxi permits, a serious new entrant at the
company level must find a minimum of 100 taxi permits from existing providers. This imposes a
barrier to new entrants at two levels: the actual licenses; and the need to be geographically
close to manage such a deal when purchasing from a multitude of small operators (large
incumbents are unlikely to cooperate). This makes it difficult for companies from other cities to
bring their successful innovations to the city in question.

Improved treatment of drivers. In a regime, with capped taxi permits, drivers without those
permits often experience poor working conditions. Available permits may be held by relatively
few companies, and drivers may feel unable to resist exploitation by those who own the right to
the driver’s ability to work. When drivers have the choice of leasing existing plates, or paying
the same amount to the regulator for an annual permit, they are empowered to reject unfair
working conditions.
Experience with Tariff Quotas
Although entry-price regulation is a logical alternative, it is difficult to find examples of taxi regimes
combining open-entry with deterrent level annual licensing fees. One reason may be that, having
overcome industry objections to opening taxi numbers, governments find auctioning taxi permits more
attractive than stepping into the place of permit lessors. Getting $490,000 per new permit up front may
be more attractive than an annual stream of $35,000.28 The immediate yield in funds is higher from
auctions, and municipal budgeting may treat license revenues as a capital acquisition, with fewer
28
The approximate permit value and corresponding lease value advertised for Melbourne as of March 2012.
Page 19 of 23
spending restrictions than annual revenues from permit fees. If immediate revenue is the objective,
maintaining a regime of fixed caps on taxis ensures a better auction price.
There is a parallel policy area where price regulation has been used as a substitute for quantity
regulation: import quotas. Many countries set quotas on imports as a form of trade protection. Over
time, these quotas acquire value in a similar fashion as taxi permits. As world economies and trade
expand, import quotas can lag in adjusting to a country’s need, frustrating would-be buyers domestically
as well as foreign suppliers. In the 1995 Uruguay round of GATT negotiations, import quotas became a
major concern, particularly for agricultural products. Less developed nations wanted access to
developed markets, and saw quotas as a barrier. The negotiated result centred on tariffication of
quotas, by converting a fixed quota to the right to import at a preferred rate, while additional imports
were permitted at a higher rate of tariff. The result is termed the tariff rate quota (TRQ). While the
declared intent was to improve access to markets for developing countries, the measures also permitted
importing nations to protect the incumbent holders of import quotas, while at least partially opening
trade at higher tariff levels.
As a program to improve market access for developing countries, the TRQ programs from the 1995
Uruguay round are largely thought to have been ineffective. In many cases, individual countries
imposed other nontariff barriers to limit their effect.29 However, TRQ’s remain an example of how
quantity-based restrictions can be converted to price-based restrictions, while protecting the interests
of incumbent permit holders.
Entry Price by Permit Sale or Lease?
Our analysis of price regulation has focused on regulating entry by setting a high enough annual license
fee to deter excess entry. A second alternative is to sell the taxi permit itself for a fixed price. The
approach is different from auctioning, in that the price is fixed while the number of permits available is
open to the number willing to pay that price.
Outright sale of taxi permits results in more immediate revenue than annual fees. In the long run,
however, revenue to the public purse may be less. Lease payments on permits usually represent a high
rate of return. Melbourne’s 2012 lease rate of approximately $35,000 per year is a 7% yield, compared
to contemporary long-term government bond yields of 4%. The higher rate of return reflects the
perceived risk of regime change (such as deregulation), and the usual market risks of return on any
security.30 Because the regulator internalizes this risk, opting for annual lease value over sale offers the
same financial benefit as taking sale revenue and investing it at a rate of return above market. The
present value of the annual permit fee exceeds the sale price of the permit.
Another disadvantage of regulator selling over leasing is the uncertain obligations it creates for the
regulator. In the British legal tradition, regulators who control the price of services (i.e. meter rates)
29
Abbot, Philip C. Tariff rate quotas: Failed market access instruments? 77th EAAE Seminar / NJF Seminar No.
325, August 17-18, 2001, Helsinki
30
Returns on any security are partly determined by their portfolio value in diversifying risk. Because taxi industry
returns are highly correlated with economic conditions, taxi permits are riskier in this sense and command a lower
price for a given expected annual return.
Page 20 of 23
have an obligation to ensure fair and reasonable or just and reasonable returns to investors in that
industry. Meeting this obligation is not normally a concern of taxi regulators. Market prices for taxi
permits are prima facie evidence that returns within the taxi industry are higher than generally available
elsewhere. That is why individuals are willing to pay to enter the industry by purchasing permits. When
a regulator takes a direct role in selling the permit, there may be an unknown obligation to include
consideration of the sale price in the calculation of fair and reasonable rates of return.
Inclusion of the artificial cost of the taxi permit in the regulatory rate base would have far-reaching
consequences, perhaps tying the regulator’s hands in future options for liberalizing the industry. In
contrast, the annual license fee, even at entry deterring levels, does not involve any implied promise
beyond the year for which the permit was issued.
Other advantages of entry-price management by leasing over selling include:
5

Better protection of drivers. As noted above, drivers who have the option of paying their lease
fee to the regulator instead of to a traditional taxi permit holder are more clearly empowered to
resist exploitation. If the alternative requires financing a $490,000 purchase, the choice is less
feasible.

Improved competition and innovation. New entrants will find it easier to finance the annual
fee for 100 new taxi permits than to purchase 100 new permits. The policy objective is to deter
excess entry driven by unemployment, not to deter competition and innovation.

More accurate regulation. It is easier for the regulator to set an annual fee directly rather than
estimate the implied barrier to entry from the capital cost of a permit sale.
Summary and Comparison of Entry Management Regimes
Table 3 compares the five entry-management regimes discussed here:
1. Open entry. The default regime in the absence of entry control. Analysis assumes the choice of
entry management regime is made within the usual framework of taxi regulation. This includes
training, testing, and criminal record checks for drivers, vehicle standards and inspection, and
regulated meter rates.
2. Quantity regulation of taxis using a cap on taxi numbers: Setting a cap on the total number of
taxis permitted (the current dominant model).
3. Quantity regulation of taxis using service standards: This is a variant of quota regulation
where the regulator takes advantage of modern technology to monitor service standards
directly from taxi company data systems and management reports. For example, the regulator
might target 80% of dispatch trips to have meter-on within 15 minutes. When the service
standard declines, additional taxi permits are issued to bring service back to desired levels.
4. Entry-price regulation of taxis through selling permits: Regulating the number of taxis
indirectly by setting a sale price for taxi permits high enough to deter excess entry.
5. Entry-price regulation of taxis using annual fees: Regulating the number of taxis indirectly by
setting a high annual fee (equivalent to the lease price of a permit), to deter excess entry.
Table 3: Comparing Entry Management Regimes
Regime
1. Open Entry
2. Quantity Regulation
(cap on taxi numbers)
3.Quantity Regulation
(service standards)
4.Entry-Price
Regulation
(annual fees)
5. Entry-Price
Regulation
(sale of permits)
National Wealth & Productivity
Taxi Industry
Broader Economy
Lower service quality as excess entry during
recessions chases experienced drivers out of
market.
Avoids excess entry, but regulatory capture
causes cap to lag demand growth. The result
is:
 Higher meter rates.
 Longer wait times.
 Deadweight loss from suppressed taxi
demand.
 Low competition and innovation.
Avoids excess entry. Risk of capture reduced
but still present. Link to objective industry
performance data improves likelihood of
good management of permit cap.
 Minor costs to industry to provide basic
reports.
 Opportunity to link to broader
technological reform and full reporting of
individual trips.
Taxi numbers expand automatically at
minimum required barrier to entry and
reduced likelihood of capture. Relative to
capped regimes there is:
 No lag in adjustment of taxi numbers.
 Less suppressed taxi demand.
 Improved competition and entry of
competitors at efficient of scale.
 Fairer working conditions for drivers.
Same as annual fee price control above
except benefits of increased competition and
improved driver working conditions are
reduced.
Fairness & Political
Sustainability
Government Fiscal
Impact
Largest supply of taxis to other
sectors.
Difficult to sustain. Periodic low
driver income from excess entry
during recessions tends to force
capped regime.
Higher enforcement costs
due to marginal
operators during
recessions, and higher
ongoing driver turnover.
Excess restrictions in taxi capacity
result in:
 Lower public transit ridership
along with increased
congestion, pollution, and road
network costs.
 Lower ability to accommodate
growing numbers of persons
with disability in an aging
population.
 Ineffective policies to revive
downtown cores and reduce
drunk driving.
Entrenched interests of private
permit holders perpetuate
regime in which:
 Customers pay too much or
wait too long.
 Excess payment goes to
permit holders, not drivers.
Reduced administrative
costs due to longer term
players and absence of
excess entrants.
As above, but with reduced risk
due to lower likelihood of
regulatory capture.
Avoids negative impacts of excess
supply restrictions.
Avoids negative impacts of excess
supply restrictions.
As above, but with reduced risk
of capture.
Possibility of preventing further
deterioration by converting
current performance to a
performance standard.
Additional cost of
receiving and processing
reports and data. Minor
if requiring management
report. Larger if requiring
real-time access to
individual trips.
Compromises can protect
incumbent interests by
grandfathering old permits.
Can be applied to cap license
number regimes so as to protect
incumbent interests, while
avoiding further lag of taxi
numbers below demand.
Increased revenues from
entry-deterring annual
permit fees.
Continued entrenchment of
vested interests with purchased
licences. Risk of capture.
Increased revenue from
sale of permits, but lower
net present value than
ongoing permit sales.
Page 22 of 23
Regimes are compared in terms of national wealth and productivity, fairness and sustainability, and
government fiscal impact.
In brief, the unique nature of the taxi industry risks excessive entry by the unemployed during economic
downturns. This in turn lowers taxi driver incomes, driving good quality drivers out and raising
enforcement costs. The income crisis within the industry accounts for why open entry is difficult to
sustain politically—traditionally resulting in capped numbers of taxis.
In theory, caps could be set at only mild restrictions. In fact, this is usually the case with a license freeze
imposed at the moment of excess supply, sometimes rationalized as temporary. Over time, regulatory
capture means caps tend to lag behind demand growth. The result is restricted supply, high permit
values, higher meter rates and/or customer wait times, drivers being forced to pay to lease permits, and
deadweight losses from restricted demand. Permit values increase to levels far in excess of what is
required to deter entry by the unemployed. Driver working conditions tend to decline as control of the
permits become concentrated in a few hands. The restricted supply also has negative impacts on public
transit use, accommodation of persons with disability, reduction of drunk driving, and revival of
downtown cores.
Losses from lagged cap regimes are proportionate to the degree of suppressed demand. Demand
elasticity estimates suggest moderate percentage losses, but per capita estimates and the experience of
liberalized regimes suggest that the potential taxi demand may be up to triple revealed demand. This is
a strong argument against permit caps.
A potentially more effective method of managing permit caps is to set performance targets based on
actual dispatch response times, and similar measures, as reported by computer dispatch systems. The
technical capability of doing this is well established, but the method is not in widespread use. This
approach offers a more effective policy rule linking taxi numbers directly to industry performance.
However, implementation still takes place within a managed cap on the number of permits, and the
risks of regulatory capture remain. Implementing this approach requires more data collection from
industry than is usual for regulators. Opportunities to change the data reporting relationship may occur
if the regulator is also considering incorporating higher technology in the back seat of taxis to improve
user experiences. When installing GPS and credit card enabled devices, systems can also be upgraded to
report real-time trip data to the regulator.
Entry-price regulation offers an alternative approach to controlling taxi entry. Annual license fees, or
equivalent sale of permits, can be set to levels high enough to deter excess entry by the unemployed,
but not so high as to significantly suppress taxi demand. Once set, the number of taxis automatically
expands with demand as competitors in the industry respond. Vulnerability to industry capture is
reduced, taxi driver working conditions improve as drivers have alternative sources of permits; and new
competition can enter at scale by acquiring new permits directly from the regulator.
Of the two methods of entry-price management, use of annual fees appears to have the advantage over
direct sale of permits. The annual fees approach yields greater fiscal rewards in the long run, and
involves lower barriers to new firms wishing to enter at scale. The direct sale of permits my also imply
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unknown obligations to permit purchasers to ensure a regime that continues to justify the price paid.
Annual permits represent commitments only for that year, preserving policy flexibility.
Traditional capped regimes can be converted to entry-price regulation, while protecting incumbent
interests, by setting annual fees equal to prevailing lease rates and grandfathering existing permit
holders. While this involves preserving the high barrier to entry from the previous regime, future
adjustments in taxi numbers will be open and automatic in response to industry growth. Previous
permit holders in such a conversion would continue to receive their established income stream, but
would lose any speculative value in their permits not justified by that stream. This compromise prevents
further damage, and provides some comfort to current industry participants.