Market Solutions Beat Top-Down Regulation for NYC Taxis

This weekend I found myself in New York City’s crowded downtown neighborhood of Soho needing a ride uptown. Especially with the subway out of service, it was a mad dash for any available yellow cabs. Situations like this make me especially happy that I no longer call the city home, but not living there meant I didn’t have the Uber app handy on my phone. Finally, I saw what I assumed would be my deliverance. It looked like the familiar New York cab but was green rather than yellow. But as I went to hail it, I was told it was illegal for the driver to pick me or anyone else up. I found a yellow cab shortly thereafter, but I was left with righteous indignation as an economist at such a blatant misallocation of resources, as all those cabs drove riderless downtown.

The creation of green “boro taxis” by the New York City government turns out to be a classic example of what goes wrong when trying to manage a market from the top down. The city felt it was too hard to find a taxi in the outer boroughs since yellow-cab drivers understandably concentrate on more densely populated areas with higher demand. In 2013, the city created boro taxis, allowed to drop off passengers anywhere in the city but banned from picking up passengers at airports and in the busiest parts of Manhattan.

Passengers and taxi drivers in the less densely populated outer boroughs of the city have a coordination problem. Would-be passengers and taxis are fewer in number and spread out over a larger space, making it difficult for the two parties to find each other. The city’s top-down, heavily regulated approach was to introduce a new fleet of cabs banned from looking for passengers in the areas that need taxis most. They are then allowed to drop passengers off in those areas, at which point they must leave and drive back to the low-demand area to look for other customers. They add to Manhattan traffic while providing nothing of value as they drive past people trying to hail a cab.

Compare this approach to the bottom-up, market-based approach of Uber. The coordination problem is solved by letting outer-borough passengers and drivers tell each other exactly where they are. It addresses the problem far more efficiently than the city’s blunt instrument, and requires no complicated rules about where one can and can’t pick up passengers. Next time, I’ll download that Uber app.