Canadian Commentary: International

Deregulation Czechmated by Taxis

October 1997

After Czechoslovakia was freed from Communist rule in 1989, taxi services sprang up in Prague to serve the often car-less local residents and the large number of tourists attracted by the city's beauty. The government, influenced by the free-market theories of western economists, decided not to impose regulations on these new taxis beyond ordering them to post their prices. No training was required, and the tradition that customers choose the first taxi in a queue was abandoned. The taxis would compete with each other, and consumers would be able to choose the most efficient services. According to free-market theory, this should have been an idyllic situation. The competition would force prices downwards and service upwards, and consumer demand would mean the most efficient companies would survive.

In fact, it was a complete disaster.

Prague's taxis quickly became the most expensive in Europe. Drivers gouged customers outrageously at every opportunity. This extortion was backed up by rudeness and agressiveness - some taxis supposedly put electric shocks in the back seat to stimulate reluctant customers/victims, and there were cases of physical assault on passengers. Taxi drivers occasionally used force against each other to take control of the best customer pick-up spots and get customers. Prague soon became known around the globe for having the worst taxis in the developed world. This bad reputation discouraged wealthy tourists, marked the city as a poor place to do business, and drove the locals to alternative means of transportation. It caused endless stress, annoyance and expense to those tourists and business travellers who did visit the city, and to the city's own inhabitants. Unlike any other major western city, Prague basically did not have an effective taxi service. It became a permanent black mark against the city, undermining its economy. The city government is now trying to impose regulations in the manner of other western cities.

How is this possible? Because, of course, the elegant theories of free-market economists have little to do with reality. No customer has the infinite amount of time required to check out every person providing a service and discover the cheapest one, nor the time to conduct a thorough examination of their credentials. No customer has the expertise to detect every possible fraud or shortcut in all of the different services a consumer makes use of during the year. Even if consumers did have the time and expertise, having to make use of them every time they wanted to buy a service would be an astonishing and inefficient waste of time.

The fact is that regulation is not only desirable, it is essential to the effective working of a free-market economy. Without regulation, the free market collapses under its own undirected energy. We are not simply talking about the general regulations of the law, either. What is required is specific industrial regulation. It may be possible to implement such regulation in a more effective manner than at present - possibly with the participation of the industry being regulated. But the necessity of regulation backed up by the force of the government remains fundamental to the operation of an effective economy.

This is demonstrated by another city whose taxis are famous, this time for their quality - the black cabs of London, England. It is remarkably easy to find a taxi in central London. When you get into the taxi, you can feel confident that it will get you where you want to go by the fastest possible route. Why is this? Black cabs in London are subject to detailed, traditional regulations (of the kind abhorred by proponents of the free market). The drivers cannot get a license without passing a detailed test of their knowledge of London, which includes not only the location of streets and addresses, but the fastest routes between locations. The result of this regulation and training is that cabs are considered reliable, and thus are widely used - which in turn makes it possible for them to be widely available. The strict regulation results in a virtuous circle.

The taxis of Prague were a perfect example of an ideal deregulated industry, and they were a complete failure. Perhaps, rather than continuing to complain that the persistence of industrial regulations violates their theories, it is time for economists to change their theories to explain why government regulation remains so persistent, and so necessary.

Oct. 24, 1997

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