An article today mentioned the new plan by the Ministry of Transport. The Ministry is considering changing the way taxis can charge their fares. It is planning to place a legal maximum and believes that competition between the numerous cab companies will drive the prices down.
Although I found it a hard book to read Levit’s and Dubner’s Freakonomics has managed to put their main message across : if you want a system to work you need to align the incentives of the actors concerned correctly. If this attempt goes through the prices will be driven up and not down.
The ministry’s plan is sure to backfire because of the nature of a taxi ride: although you can choose from many taxi companies to go from A to B, the taxi driver is in a monopolistic position from the moment you sit in the car and he drives off. Such a maximum ceiling will result to abuses: from the moment you sit in the car you have no choice but to pay what the driver asks, and since you will not get to your destination in time unless the taxi driver takes you. The Maximum price will become the normal price.
Four years ago I learnt the hard way that if one wants to travel a long way by cab in
I hope this plan is changed and not enforced – because misaligned incentives will lead to even higher taxi fares that the ones we have today.