Last week, the National Association of Manufacturers issued a study suggesting that the cost of complying with federal regulations was equal to $2.028 trillion, or roughly equivalent to 12 percent of total GDP. For manufacturers alone this equaled about $19,564 per employee per year – this comes directly from the pockets of workers, investors and consumers. ( www.nam.org/CostofRegulation).
And NAM’s research does not even take into account the billions of dollars that it costs to comply with thousands of state and local regulations, or as we pointed out last week, the potential cost of complying with regulations that are on the books but not enforced.
Other regulations don’t directly impose costs, but harm consumers via reduced competition or reductions in service. An example of this would be the monopoly licenses granted to taxi-cab operators in most cities in America. These regulations impose what economists call “price floors,” making hiring a car not only more expensive but less convenient.
In this week’s edition of REGonomics, we head to Cleveland, Ohio, to examine taxi regulations in that city.
Residents of Cleveland Face $5.5 Million in Additional Costs Due to Government Imposed Cartel
Striding the banks of the Cuyahoga River, stands the city of Cleveland, Ohio. Cleveland reached its peak in the post war years, when in 1948 the Indians won the World Series. Since that time,Cleveland’s population has fallen by almost two thirds. It became the first large American city to default on its bonds, and its river even caught on fire.
While many of the economic problems that led to Cleveland’s downfall were the result of circumstances well beyond the control of the city or its companies, many businesses left the city because it is an expensive place to operate. One reason for this is that government imposed regulations force up the price of goods and services. Take for example the provision of taxicab services in the city. Cleveland, like many American cities licenses taxicab operators. There are a number of good reasons for this. Licensing can help ensure that operators carry proper insurance, or establish background checks for drivers. Licensing also helps to ensure that taxis are maintained and safe to operate. But this can be done without drastically limiting the number of cabs on the road, or discriminating against specific drivers or firms. And it is these limits that really lead to price increases.
Cleveland’s taxicab ordinance is somewhat unique in that it requires a minimum company size. According to the City’s transportation code, The Commissioner of Assessments and Licenses shall not issue a license to any independent operator until the independent operator provides the Commissioner with evidence that he or she is a member of, and will operate as part of an association approved by the Commissioner. The code defines an independent operator as anyone operating less than 25 hacks – or vehicles – and an association as having at least 25 hacks. This effectively limits taxicab operators to larger firms, and prohibits independent operators from obtaining a license. On top of this, Cleveland limits the overall number of licenses issued to 500.
According to a report by the Buckeye Institute, only 3 companies operate taxis in Cleveland and the total number of licenses that have been issued is under 300. This report goes on to suggest that the limit on the size of operators ensures that 200 potential cabs are kept off the market. (www.buckeyeinstitute.org/docs/taxistudy1.pdf). In effect, the City of Cleveland has created a cartel for taxi services, and this cartel has restricted supply by two-fifths.
How does this affect prices? According to an article in the Journal Transportation, the price elasticity for taxicab services is about -0.22. This means that the cost of a taxi trip is 8.8 percent higher than need be. As stated on the website Taxifarefinder.com, the current cost of a trip from the Cleveland Airport to say the Rock and Roll Hall of Fame is $37.48. This trip would cost $3.30 less were all 500 hacks to be in service. While that may not seem like a lot, a reasonable estimate of total taxi sales in Cleveland is about $63.3 million annually. If this is the case, the restrictions on the size of companies allowed to operate taxi cabs in Cleveland are costing consumers over $5.5 million per year. Since there are only 391,000 people in the City, the cost of this regulation is about $14.25 per person. This is a lot of money is a city where 34 percent of the population lives below the poverty level.
In the modern world, where ride sharing sites like Uber are allowing individuals to provide convenient taxi service at reasonable prices, the fact that people in Cleveland have to spend over $5.5 million to ensure that only 3 companies can operate cabs in that city is insane. Over regulation is one of the greatest problems facing business in America today, and governments that restrict legitimate commerce are not helping.
Do you have a ridiculous regulation you want us to discuss? Send us an email.