Schafer: Regulation isn't always a problem for business

The city of Duluth is reconsidering its experiment with a deregulated taxicab market.

There are still rules for them in place, of course, but in 2002 the cap on the number of licensed cabs allowed by the city, then 35, came off. The result 13 years later is chaos.

There are reportedly 150 cabs looking for fares in Duluth, from 29 companies. That's not counting the unlicensed cabbies that some taxicab owners suggest are regularly plying their trade there, too.

The city official taking the lead on the issue has heard from customers about the sorry state of some taxis in town. Given the suspicions most businesspeople have about increasing regulations, maybe the right question is whether companies in the taxi business are also hoping City Hall enacts stricter regulation.

The answer is yes. Of course some of them do.

This makes the Duluth taxi market a little case study in business regulation. And it's not entirely a surprise to see business owners not just putting up with regulation, but asking for more.

A business owner may look for greater regulation out of pure economic self-interest, of course. Once in the market with a valid license to operate, business owners tend to become reluctant to see the regulatory burden eased. They have no problem with the regulator making it just a little more difficult for competitors to jump into the market after them.

Using the regulatory process to try to protect profits by limiting new competition, rather than competing for customers on such factors as price, convenience or quality, is what is described by that wonderful term from economics called "rent seeking."

To suggest that some kind of rent-seeking effort on the part of businesses goes on all the time would be a considerable understatement. The cost of all this "rent," as the word means here, is economic inefficiency.

But what has happened in the Duluth taxi market is not an easy call. Competing for fares against a cabbie driving a candidate for the junkyard can't be any fun, but is it "rent seeking" to ask the city to keep the junkers off the streets?

No one in the taxicab business could deny that it's a lot easier to keep busy driving well-paying customers in a city of 86,000 when there are only 34 competing cabs as opposed to 149. It's easy to find owners who now say it's all but impossible to make money and still pay staff and keep the cars properly maintained.

"I was driving back when there were 35, and we barely had enough business back then," said Marlon Bailey, owner of Airport & Duluth Taxi. But it's not the regulator's job to make sure everyone has enough customers or can make money.

In minutes summarizing the debate from the August 2002 Duluth City Council meeting, the thinking behind taxicab deregulation was put this way: "There is no clear public purpose to limit the number of taxi licenses in Duluth. The reason for the issuances of licenses is for public safety, not which companies will survive in today's market."

The council bought the sensible argument that the market itself should be able to cull the weaklings, with the less successful providers simply quitting the business.

"But they didn't do that," Bailey said. "All they did was quit doing maintenance and quit buying new cars."

And the sagging condition of the taxicab fleet certainly is a concern in City Hall. Taxis are a big part of the public transportation system, said Sharla Gardner, the city councilor taking the lead in reviewing the current state of the market.

Cabs are used by more than just businesspeople. She hears from disabled folks and the elderly, who need cabs to get around on errands or to appointments.

"I do know this," she said. "We need to upgrade our standards. Some of them are just not safe. That is not something we want to let go too long."

She said the council also wants to explore pricing. She's a little skeptical that the problem is as bad as some residents describe, but she's fielded complaints that prices vary widely for the same trip. And it's clearly not in the public interest to see customers gouged just because the cabbie judges the rider to be vulnerable.

Gardner is just starting her review of regulatory policy, and has yet to contact any taxi company owners.

It seems unlikely that the city would even consider going back to a cap of 35 on the number of licensed cabs, but higher standards for vehicle appearance, maintenance and amenities could easily get carried too far. Another form of rent seeking is lobbying for strict enforcement of "standards" that only the best-funded companies can meet.

Perhaps Gardner will learn from talking to cab owners that they are far from agreeing on just what the standard should be.

One person she probably won't interview is Mike Mathias, a local entrepreneur and driver identified in 2002 as the principal owner of USA Taxi. His was the strongest voice pushing for deregulation.

Gardner wasn't on the council then, but she happened to attend the meeting when the taxicab policy was debated and then got the votes it needed for approval. And to her, she said, "they seemed to be doing all this for just this one guy."

A phone listing for Mathias in the Duluth-Superior area could not be located, so it's not clear what business this advocate of a free taxi market is in today. It's apparently not taxis.

USA Taxi went out of business maybe nine years ago.

lee.schafer@startribune.com • 612-673-4302