Who are the winners and losers from the rise of ride-hailing platforms? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Juan Camilo Castillo, Assistant Professor, Economics Department at University of Pennsylvania, on Quora:
Who are the winners and losers from the rise of ride-hailing platforms? This is an interesting question that is complicated by the fact that many different stakeholders are affected by these platforms.
Ride-hailing platforms offer a technological edge over traditional taxis. They use real-time smartphone location data to match riders and drivers more efficiently. This not only reduces wait times for riders, but also minimizes idle time for drivers. Additionally, these platforms enable drivers to follow more flexible work schedules than traditional licensed taxis, allowing them to work after their full-time job or during their children’s school hours. As a result, ride-hailing allows transportation markets to operate more efficiently than with taxis, benefiting both riders and drivers.
However, both taxis and ride-hailing cause important negative externalities. Every trip hurts others because it congests roads and leads to emissions of carbon dioxide and local pollutants. There are two standard solutions that economists suggest for these kinds of externalities: charging taxes or placing a cap on the number of trips that can take place.
Around the mid-20th century, as traffic congestion and pollution started becoming major problems, most major cities decided to follow the latter solution. They imposed a cap on the total number of taxis allowed to circulate. They then did something that seemed innocuous at the time, but which turned out to be important over time: they gave taxi drivers property rights over driving permits (commonly known as “medallions” because they took the form of a physical medallion that was attached to the taxi). This decision created a whole new market in which drivers could buy and sell medallions. It also allowed private investors to purchase medallions and lease them to drivers daily.
Fast forward to the early 2010s, and medallion markets had taken on a life of their own. Over the decades, with the rising demand for taxis, medallion prices skyrocketed. They reached around €250,000 in Paris, $900,000 in Hong Kong, and $1 million in New York. The rental of medallions became so profitable that many individuals, including taxi drivers themselves, invested their life savings into them.
Around 2014, Uber entered the scene. The influx of ride-hailing drivers disrupted the scarcity of drivers that underpinned the value of medallion owners’ investment. As a result, in cities that permitted Uber to enter freely—often the case in the US—medallion prices collapsed. This loss devastated many medallion owners, with some reports even indicating instances of suicides. In other cities, especially in Europe, taxi drivers and medallion owners had more political influence, so local governments either banned Uber or placed restrictions on its operations.
Cities trying to regulate ride-hailing platforms thus face a complex puzzle. They would like to harness the technological advantages of ride-hailing, while at the same time limiting its negative externalities and making sure that medallion investors—including many taxi drivers—don’t suffer devastating financial losses. A potential solution is to allow both taxis and ride-hailing platforms to operate without caps. Instead, a per-trip or per-mile tax can be charged to address the negative externalities. The revenue from such taxes could then be used to compensate former taxi license holders.
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