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Insights into Editorial: Ignore the demagoguery

Insights into Editorial: Ignore the demagoguery

09 May 2016

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App-based taxis are in news again for imposing surcharges that is charges which are often above the government prescribed limit. Various state governments, including Delhi, have stepped in to solve the issue.

What is a surcharge?

Surcharge is the “peak-time” fare. It is a business practice in which companies increase the rates of cabs when the demand goes up. However, the fixed peak hours are fluid i.e., they are not fixed.

Why they are imposed?

A surcharge is levied based on dynamic pricing. This is usually charged during holidays like New Year, and is done to encourage more driver partners to sign on during this period.

Why it should not be imposed?

  • Surcharges distort the level playing field. A higher than normal price is inefficient because some cabbies and some customers can negotiate a mutually beneficial trade at a lower price thereby distorting the level playing field.
  • They are usually three times to five times higher than the usual rates in rush hours. Hence, the commuters will have no option other than paying the extra amount or waiting for the prices to go down. Therefore, consumers are the worst affected by this.

Why governments should not interfere in this matter?

Few experts argue that surcharges are economically rational. They say, given exogenous factors such as the weather and the time of day, the instantaneous demand and supply of taxis vary with the price, and hence aggregators should be permitted to charge higher prices during peak hours.

How states limit taxi market?

  • By mandating a permit for operating a taxi, thereby making the supply of taxis very inelastic.
  • By fixing the price of the service. However, these fixed prices do not take into account changing exogenous factors which move demand and supply, leading to a fluctuating equilibrium price.

What is the proper role of the state in this market?

It is certainly not right move to ban flex-price cabs or regulate prices since this market is very competitive. Trade at market-determined prices is a remarkably resilient institution with far greater embedded intelligence and creativity than any state authority. Not only are bans and pricing fiats generally counter-productive, they are also ineffective if the targets of such coercive actions have the means and motives to subvert the state’s directives. So, the state should concentrate on its legitimate functions of implementing quality-of-service standards, and more generally, enforcing traffic laws.

Why app-based taxis are good?

  • They provide a common platform for both taxi-seeking customers and customer-seeking taxis.
  • They solve bargaining problem thereby save a significant cost in terms of time and psychological distress.
  • They implement the mutually beneficial trades implied by demand-supply mismatches. While prices increase when demand is greater than supply, they also fall when supply is greater than demand.
  • They also make taxi markets more competitive. They end the monopoly of traditional taxi stands.
  • Other than legal and administrative barriers, entry into the taxi market is easy because the required software is easily acquired and the entrant does not have to invest in a car fleet, since one only needs to incentivise car owners to acquire an appropriate license and become part or full-time cabbies.
  • This makes the ability of the supply-side of the market to respond flexibly to price signals makes the taxi supply far more elastic than under a rigid permit regime.
  • With this, there is also a marked improvement in the quality of service relative to the neighbourhood taxi-stand benchmark. This should enable a switch away from private cars to public taxis, leading to lower congestion and pollution.
  • Off-peak prices are much lower than those of traditional cabs.

Conclusion:

It is time now for the government to cautiously proceed ahead in this matter and take suitable actions which do not hamper the app-based taxi market. The government should also make sure that the given space is not misused by the service providers.