Ride-sharing shows how slow governments can be

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With the Pennsylvania Public Utility Commission recently issuing cease-and-desist letters to ride-share services Lyft and Uber, Pittsburgh Mayor Bill Peduto invoked the Age of Reptiles to describe the decision:

“Technologies like ride-sharing evolve with the times and state regulators must, too,” said Mayor Peduto in a prepared statement. “While the commission may wish for Pennsylvania to cling to a Jurassic Age of transportation options, people in Pittsburgh and other communities know our state must adapt or die in the global marketplace.”

Regulators in some places like Colorado are adapting. But from Milwaukee to Miami and Paris to Pittsburgh, more often than not, policymakers have taken the position that ride sharing is illegal until proven otherwise.

Predictably, this position puts regulators at odds with the ride-sharing firms and their drivers. Somewhat more surprising is the backlash from consumers.

When in 2012 the Washington, D.C., city council proposed rules that would have required Uber to charge no less than five times what taxis charge, the public reaction was so swift and negative that the council withdrew its proposal within hours. And Virginia’s cease-and-desist order was so unpopular that the commonwealth just rescinded it after it was in place for only a few weeks.

How is it that regulators charged with protecting consumer welfare so often find themselves at odds with consumers?

It is helpful to look at the historical rationale for taxi regulation. Passengers suffer from what economists call an information asymmetry: When hailing a cab on the street, there is no way a would-be passenger can see the car’s interior before getting in. There is no way to evaluate the driver’s record to be sure it will be a safe ride, to know the driver is adequately insured or to confirm that the driver knows his or her way around town. In most cases, other cars are not immediately available, and consumers have no choice but to accept the ride or to decline it and hope that another taxi comes along.

Given these problems, policymakers turn to regulations — enacting codes of conduct and creating regulatory bodies, charging them with pre-screening drivers and pre-approving companies.

How do consumers fare under this traditional approach? In Pittsburgh — as in most cities — the average score given to taxi companies by Yelp users is two out of five stars. In short, not so well.

Now come Uber and Lyft. Using technology that was unavailable (and unforeseeable) to those who initially crafted the regulatory solution, these ride-share services found a way to provide an answer to the asymmetric information problem that plagued the taxi industry for so long. With the touch of a button, would-be passengers can request a car without having to set foot on the street to hail a cab. And, before the car even arrives, the consumer can see how other riders judge the particular driver’s service. If consumers don’t like a driver’s rating, they can simply cancel the ride and request another car.

Uber and Lyft monitor these ratings closely to ensure the highest level of quality and satisfaction. If a driver’s score drops too low, the companies stop working with him.

Regulators at Pennsylvania’s Public Utility Commission should be happy that the market is adapting and that companies like Uber and Lyft are solving the asymmetric information problem. Instead of congratulating these companies, however, the PUC has pre-emptively banned these services.

Regulators, it seems, adapt to change at a geologic pace.

Matthew Mitchell is a senior research fellow and the lead scholar on the Project for the Study of American Capitalism with the Mercatus Center at George Mason University, where he is also an adjunct professor of economics. Christopher Koopman is the program manager for the study.

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