Thursday, 24 April 2008

Incentives – Taxis in Cyprus Need a bit of Freakonomics

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
Morocco one needs to haggle the price in front of many cab drivers in order to get competition working to your advantage: usually bargaining results in a price that is mutually beneficial. Get in the car prior to the price being arranged however and you will see that haggling is not tolerated because as passenger you have lost your bargaining power over the driver. Another example is in Greece: the taxi driver will pick up other people only after he is on his way even if he promised you when boarded his taxi that he will not pick up other people - you cant just leave as the car is moving!.

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.

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