Regulating innovation: analysing taxi service in Toronto

Regulating innovation: analysing taxi service in Toronto

Last March, German courts ruled against the app-based taxi service, Uber, barring them from further operating. Along similar lines, the City of Toronto is currently seeking an injunction against Uber, arguing that it operates a taxi service without proper licencing.

Uber claims that it is operating a technology firm that contracts taxi services from driver-partners to meet its clients’ demands. It is unfortunate that the stance of some government officials is to ban a technological advancement instead of working to ensuring all safety concerns are met and to encouraging an efficient and competitive market. Uber is not alone; other innovated taxi companies such as Lyft, Sidecar, and Flywheel have also opened up around the world in an attempt to better serve the taxi market. Current regulations stand in the way of competition and are likely stifling innovation when enforced without careful consideration.

Toronto presently authorizes 1,313 ambassador taxi licences along with 3,451 standard taxi licences. Ambassador licences are untradeable and their owners must operate the taxi. The standard licences are problematic, in that they can be purchased and then rented out to drivers who pay exorbitant fees for the right to work. Drivers have reported paying $1,500-$2,000 a month to middlemen in order to be permitted to work in the city. The restriction on the number of available licences has driven up the price of ownership to levels that are unreachable by many drivers. A single license was selling for as much as $300,000 as of February 2014.

Toronto operates with a taxi density of 18 cabs per 10,000 people, which is denser than comparable Canadian cities such as Vancouver (10 cabs per 10,000 people) and Ottawa (15 cabs per 10,000 people). However, this lags far behind major American cities such as Boston (30 cabs per 10,000 people) and New York (63 cabs per 10,000 people). The City of Toronto has historically restricted the number of taxi licenses to ensure drivers’ earnings; but the current arrangement allows middlemen, garages, and dispatch services to absorb a significant portion of the benefit from this government-created monopoly. The City of Toronto recognised this and proposed converting current licences into new Toronto Taxi Licences by 2024, which would require owners to drive the cab and only rent out the licence part time. This change would prevent a single owner from collecting rent indefinitely on multiple licences. Disappointingly, earlier this year Ontario’s Superior Court ruled that a mandatory deadline for conversion cannot be imposed by the city.

That said, the new Toronto Taxi Licences would not have addressed the problems associated with a lack of competition. Industries that operate under regulatory protection for extended periods of time have a tendency to become uncompetitive and stagnant with regard to innovation. This is highlighted by the way consumers flock to a new competitor. Uber has had an easy time entering markets throughout the world where customers find their ease of use, improved dispatch response time, price point, and quality of service all to be improvements over the competition.

Uber offers a dynamic pricing model to better serve both their drivers and consumers. Their business model allows them to take advantage of the basic economic principle of supply and demand. During off hours (10a.m. to 4p.m.), rates are reduced by 25 percent in an effort to increase service uptake and decrease drivers’ downtime. If demand increases disproportionately to supply, the system is capable of instituting surge pricing. Surge pricing increases the fare associated with the ride to incentivise more drivers to serve the market during times of heightened demand. As demand is satisfied, the price returns to the baseline. Users are free to determine if their valuation of the service matches up with the current price. Alternatives still exist in the form of UberTaxi, which offers standard taxi meter rates or more traditional taxi services within the city.

Interest groups claim that Uber endangers their customers as drivers are not licences or insured in the same way that traditional taxi drivers are. Uber refutes this stating that their drivers undergo a more in-depth screening process than traditional taxi drivers. So far Uber has rejected 26 driver applications in Toronto due to failed background checks. Uber also carries a five million dollar contingent insurance policy on top of each driver’s personal insurance.

Uber’s innovative platform is associated with enhanced customer satisfaction and safety, as each trip can be rated on the app. Users can view their driver’s entire profile including picture, license plate, photo, and rating before the driver arrives. Uber takes customer feedback seriously and uses this information to identify and suspend problematic drivers. Driver-partners have a significant incentive to behave courteously, drive safely, and take optimal routes to maintain a high reputation. By contrast, taxi drivers are often anonymous and customers are unaware of the quality of the driver until they are already on the road with them. Uber’s driver-partners also benefit from increased safety as each passenger and trip is fully recorded and customers are given a rating by the driver after each trip they take. Uber claims passengers are more respectful of drivers and their cars because they care about their ratings. However, Uber does lack the driver training program that traditional taxi drivers undergo. This program teaches taxi drivers defensive driving, first aid, route planning, and major destinations.

A 2015 working paper issued by Princeton’s Industrial Relations Section analysed the demographic of Uber drivers and compared their findings to traditional taxi drivers. They found that Uber drivers’ earnings were at least as high as those of traditional taxi drivers and that drivers’ hourly wage did not decrease when they worked fewer hours (avoiding the typical wage penalty). The researchers also found that, relative to taxi drivers, Uber drivers are more similar to their clientele in almost all demographics, such as age, education, and gender[1]. The decreased cost for consumers has translated into an increased demand for taxi services at large.

Toronto’s mayor, John Tory, agrees with many Torontonians that people want better technology, more convenience, and more affordability in their taxi service. If a company can provide this in a safe manner, then the city should work with them to make it a reality. Uber is the competition that the taxi industry needs. Removing artificial monopolies and updating regulations can allow the taxi industry to better serve the public through lower rates, higher quality service, and enhanced driver earnings.[2]


[1] Jonathan V. Hall and Alan B. Krueger. (2015). “An Analysis of the Labor Market for Uber’s Driver-Partners in the United States.” Princeton IRS Working Papers, 587: 1-26.

[2] Ibid.

Photo Credit: Lyudinka, Getty Images 

Category: Innovation, Public Policy, Technology, Public Transit