Uber, Economic Regulation, and the Open Market

In municipalities throughout Nova Scotia, as is the case across much of the Western world, local councilors are responsible for regulating the taxicab industry. This process primarily entails controlling prices and restricting licenses, as well as implementing safety regulations. Technological innovation, however, is changing the taxicab industry and governments have failed to heed the improvements brought by it.

Upon moving to Halifax in 2010, I noticed that taxicabs didn’t offer debiting services; in 2014, nearly every taxicab in the city provides this service. Halifax may be unlike other “big cities” in Canada, yet, technology available in Toronto, Montreal, and Vancouver is available here. To attract and retain consumers, i.e. riders, taxicab drivers must offer good services in return for the price they charge. In The Road to Serfdom, for instance, Friedrich Hayek argued, “Our freedom of choice in a competitive society rests on the fact that if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist, we are at his absolute mercy.”

The law of supply and demand suggests that the price for any given product will be variable until quantity demanded by consumers matches quantity supplied by producers, at which point there is equilibrium and all markets “clear.” This law does not apply strictly to the taxicab industry, where government controls the price of taxicab services and regulates the entry, and, therefore, “supply,” of drivers: restricting the supply of drivers creates excess demand for them, and this excess demand places upward pressure on the price of their services. Consumers, many of whom rely on taxicabs as their primary mode of transportation, absorb the rising costs of ineffective taxicab regulation.

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Taxicab drivers in Nova Scotia operate in a “non-market economy,” wherein government intervenes in the process of allocating goods and resources and determining their prices. This intervention creates a deadweight loss: “A buyer would be willing to buy the good at a price that the seller would be willing to accept, but such a transaction does not occur because it is forbidden by the quota.” Economic regulation of this type results in a net loss for consumers: “In every case in which the supply of a good is legally restricted, there is a wedge between the demand price of the quantity transacted and the supply price of the quantity transacted. This wedge has a special name: quota rent. It is the earnings that accrue to the [taxicab licensee] from ownership of a valuable commodity.”

In an open market, competition between drivers would place downward pressure on the price of their services and consumers would reap the benefits. Moreover, competition compels taxicab licensees to vie for consumers by offering better services, which results in a more robust and efficient market, whereas in the absence of market dynamism, the incentive to innovate is very low (or nonexistent).

Restrictive regulations in the taxicab industry, combined with the advent of technology, have resulted in emerging markets that fall outside the purview of economic regulation. Uber is a prime example.

Arriving in Halifax this past summer, the Chronicle Herald welcomed Uber with the headline, “Controversial Uber car service starts up in Halifax.” Uber provides a car-for-hire service similar to taxicab companies, however, its operations are unregulated due to “laws [that] weren’t written to account for technology that exists today.” One of the primary reasons that governments pursue economic regulation is to compensate for “information asymmetry,” but Uber provides a solution to this problem: it uses a rating system that gives consumers pertinent information about their driver. In other words, Uber is a product of competition and the company’s innovative model benefits drivers and riders. Perhaps it is time for governments across Nova Scotia to consider whether deregulating the taxicab industry and using a model similar to Uber’s would benefit consumers.

Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Pipeline vs. Rail: Debating the Transportation of Crude

The transportation of crude oil from Alberta’s oil sands to other parts of the country, in addition to the United States and overseas markets, is an issue of contention for many Canadians. Due to Alberta’s geographical constraints, its oil and gas industry faces issues selling their product to international markets and must ship it through other provinces in order to access the ocean for transportation to Asia. Since Canadian pipeline infrastructure is limited, companies typically rely on railways to ship oil to refineries on Canada’s eastern coast, such as Saint John, New Brunswick’s Irving Oil Refinery and Sarnia, Ontario’s Chemical Valley.

Canada’s rail infrastructure is the most economical option, in terms of both shipping capacity and geographical scope as several refineries and shipping ports connect to the railway lines. Rail, however, has proven to be a more dangerous option than pipelines.

The tragedy in Lac-Mégantic, Quebec demonstrates how dangerous crude oil transportation by rail can be. There were also accidents considered less severe, such as earlier this month when a train derailed while transporting four cars of crude oil near Plaster Rock, New Brunswick, threatening the environment and those living in the surrounding area.

These accidents have compelled Canadians to question if transporting oil is safe at all, which has some pondering whether barring its transportation is the right solution. That, however, is not a sound policy option for two primary reasons.

First, some studies have shown that pipelines are a much safe alternative to rail, such as Intermodal Safety in the Transportation of Oil recently released by the Fraser Institute. This report examined pipeline safety in the United States and found that per billion tonne-miles of petroleum transported by rail, there was an average incident rate of 2.08 between 2005 and 2009.  Contrasting these figures with pipeline incidents, of which the average incident rate was only 0.58 per tonne-mile during the same period, the Fraser Institute numbers show that shipping crude via pipeline is 3.6 times safer than railway transportation. It is also important to note that, between 2005 and 2009, there were 23.9 billion tonne-miles of oil transported via rail, compared to 584.1 billion tonne-miles via pipeline.

While these findings are well founded, other studies have different conclusions. The Association of American Railroads, for example, claims that between 2002-2012 rail had a spill rate of only 0.38  per million barrel miles compared to 0.88 for pipelines. Depending on the numbers, though, there are different outcomes. Nevertheless, these contradictions show more that there is a need for this debate as the issue is in many ways still unresolved.

The second reason for not barring the transportation of crude is that the oil sector serves a major role in Canada’s economy. Energy projects contribute significantly to the livelihood of Canadians and restricting those developments would have a negative effect. They also create massive amounts of economic activity. For example, in October 2013, roughly 8 per cent of Canada’s GDP came from mining, oil, and gas extraction. Atlantic Canada can also benefit from increased pipeline infrastructure, which I touched upon in an earlier article on the Energy-East Pipeline.

In conclusion, pipelines transport a majority of crude, but we must be mindful of the fact that pipelines could be much safer than rail for transporting crude when considering newer and larger projects such as Energy-East and Northern-Gateway in the future. There are strong arguments from both sides showing the need for a rigorous debate on this issue.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute