Economics

London’s Government-Granted Taxi Monopoly, Explained

It’s hard to imagine London without its distinctive “black cab” taxis. They’re as quintessential to the city’s image as its red double decker buses and phone boxes. But, like the phone boxes, technological progress is starting to make them obsolete. The growth of ride-hailing apps such as Uber, together with older private hire car services, is gradually taking market share away from the traditional taxis. 

This is in spite of the fact that the black cab industry benefits enormously from preferential treatment by Transport for London (TfL), the city’s public sector transport provider and regulator. The cabs have special privileges, enabling them to do things like pick up passengers from the curb without a booking, do U-turns in the middle of the road, and use bus lanes, which other “private hire” taxis and ride-hailing services may not. Black cab drivers can get brand new electric vehicles, partially subsidized by TfL. The black cab industry is heavily unionized, and has mounted large-scale protests against Uber (which twice lost and regained its license to operate in London), as well as protests to maintain their special privileges.

The fact that other operators have managed to make any inroads at all in such an environment is testament to the fact that their services offer passengers benefits the traditional taxis do not. These include ease of booking and paying through their apps, lower fares, and the ability for drivers and passengers to rate each other. How much more competitive might those other services be if they had the same freedom to pick up passengers without a booking, or use bus lanes to bypass backed-up traffic?

These privileges indicate the fundamental difference between the black cabs and other services: The black cabs are a government-granted monopoly. Although they do have competitors broadly speaking, the black cabs are able to operate exclusively in the curbside hailing market, and charge extortionate fares in the process (I once paid £15 ($19) in a black cab for the two-mile journey from Piccadilly to Euston). In the absence of direct competition, and with the less direct competition hindered by the government-granted privileges the black cab industry has, the black cab operators are able to enjoy a dominant position in the market regardless of the quality of service they provide and the prices they charge for it. 

This is completely different from a monopoly that a company might achieve through free market competition. Such a company cannot use coercion to maintain its position—it must continue to provide the best available service to do so. Conversely, government-granted monopolies are by their nature coercive. As Nathaniel Branden explains in his “Common Fallacies about Capitalism”:

In the entire history of capitalism, no one has been able to establish a coercive monopoly by means of competition on the free market. There is only one way to forbid entry into a given field. . . by law. Every coercive monopoly that has ever existed. . . was created and made possible only by an act of government; by special franchises, licenses, subsidies, by legislative actions which granted special privileges (not available on a free market) to a man or a group of men, and forbade all others to enter that particular field. (Ayn Rand, Capitalism: The Unknown Ideal (New York: Signet, 1967), 74)

Government-granted monopolies also come with strings attached. In the case of the black cabs, all drivers must pass “the knowledge,” a test in which they must demonstrate complete memorization of London’s gigantic network of streets. The vehicles they drive must meet TfL’s standards in terms of efficiency, appearance, and internal configuration. Some of these requirements (such as the black color of the vehicles) are completely arbitrary. Others, such as “the knowledge,” are a hangover from a time before smartphones and GPS navigation, demonstrative of the sloth-like nature of government when it comes to keeping up with the times.

Astonishingly, the black cab unions are calling for a competitive “level playing field” between themselves and their competitors—not by removing the special regulations and privileges they have, but by applying those same restrictions to other providers as well (but, conspicuously, not the privileges). They do not want a free competitive market where the best service wins, but rather to extend government coercion to restrict the market, and people’s choices and opportunities, further still—all to protect their industry and their jobs in it. Branden has a clear response to people who exhibit this mindset:

No one can morally claim the right to compete in a given field if he cannot match the productive efficiency of those with whom he hopes to compete. There is no reason why people should buy inferior products at higher prices in order to maintain less efficient companies in business. Under capitalism, any man or company that can surpass competitors is free to do so. It is in this manner that the free market rewards activity and works for the benefit of everyone—except those who seek the undeserved. (Capitalism: The Unknown Ideal, 77)

Fortunately, there are some who see the unfairness of this situation. A new paper by the Adam Smith Institute calls for a truly level playing field in London’s taxi industry, with a much-reduced regulatory framework applied to all providers equally. This paper didn’t go as far as proposing the removal of subsidies and regulation, yet it still provoked a fierce reaction from the black cab industry, with spokespeople calling it “a race to the bottom” and potentially “catastrophic.” Would removing the black cabs’ special privileges and letting passengers decide which service to use would constitute a race to the bottom or a catastrophe? No—it would be a race to the top, with the best service winning. That is how a free market operates.

It may well be that, in such a deregulated market, the traditional black cabs would compete successfully and remain a distinctive feature of London’s streets. Even if they didn’t, black cab drivers could switch to other providers. They could even capitalize on the tourist potential of the distinctive cabs and use them for sightseeing tours, as many owners of vintage London buses have done, keeping them a part of London’s evolving street scene. But it makes no sense to protect an industry from competition to maintain an outdated status quo. If London had operated on that premise in the past, horses would still be the dominant form of transport. Thankfully there weren’t any stable boy unions around to make that happen.

The post London’s Government-Granted Taxi Monopoly, Explained was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.

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