European Regional Science Association 36th European Congress ETH Zurich, Switzerland 26-30 August 1996

Juan C. Martín Departamento de Economía Aplicada. Universidad de de . Las Palmas G.C. ES [email protected] THE TAXICAB INDUSTRY IN . SOME RELEVANT ASPECTS.

ABSTRACT: The 'regulation' is found many times in both legal and non-legal contexts. Unfortunately, it has acquired a surprising variety of meanings. Sometimes, it is used to indicate any form of behavioural control, independently of what the origin is, but when we heard to politicians and others speak about the bad effects of regulation in the industry and the need of the deregulation, they clearly do not have such broad concept in mind. It is assumed instead that they are referring to the central meaning of regulation: a sustained and focused control exercised by a public agency over activities that are valued by a community. The aim of this paper is to present the regulation of the municipal or state in the taxicab industry in the cities of , focusing relevant aspects of the Canary Islands Community. We show empirical evidence of how profits of the operators can be affected by supply factors as the working hours of the different labour force employed in the industry and kilometres done by them. Finally, we essentially try to extract some information required by the transport decision makers of the municipalities and anticipate some results of alternative policies that can be employed in the future. 1. Introduction.

In recent years one of the most exciting areas of economic policy - government regulation and antitrust - has changed dramatically. In this article, we are concerned with the regulation in the taxicab industry. To analyze the industry, it is important to discuss essential aspects of the regulation and its performance, but it is more important to investigate the economic tools used to compare different rules and policies. Future policies may have quite a different structure from those presently in place. Quantity control of local taxi industries is the norm in the majority of the cities in the world, but London’s taxi industry is one of the very few in the developed world in which there is no quantity control over the entry or exit of cabs and/or drivers, and combines this with significant quality controls. The cab must be an Austin FX4 and the driver must obtain a special licence.

To ascertain what objectives government regulators must have, one must consider starting to answer these questions:

1. What particular market failures provide the need for government intervention?

2. How can economic theory illuminate the character of market operation, the role for government action and the appropriate form of government action?

3. Can formal empirical analyses of economic behaviour and the effects of government intervention indicate the direction that the regulation should take?

Economists have made substantial progress in recent decades in developing frameworks to establish how regulators must make decisions, which is often quite different than one would predict based on the objectives of the agency. A great variety of political factors also affect the policy outcomes that result. In many circumstances legislative mandates define the terms of the regulatory debate and impose narrow limits on the range of selection of the regulatory officials. One can obtain more information in regulatory economics in Kahn (1988), Baron and Besanko (1987), Caillaud et al (1988) and Laffont (1992).

- 1 - 2. Actual regulation in the taxicab industry in Canary Islands

The development and the progressive transformation of the mobility necessities of the present-day society have been the cause of the appearance of distinct systems of public transportation. The service of the taxi industry has played, and plays, a notable paper in the structure and organization of the terrestrial transportation, having in the urban boundary more importance. Although, it has been considered as a luxury service, provided in emergency or not habitual circumstances, the reality demonstrates that this manner of transport has to be considered as part of a complex framework and may be the better election for some trips generated inside of the cities.

The origin of the taxi can be placed in England. In 1654, the authorities of London permitted the creation of The Fellowship of Master Hackney Coachmen. Years later, they made the adaptations to the existing regulations with the objective of making the service more uniform. At the end of the 17th century, the association had already two hundred fifty associates and everybody was established in the city of London.

The proliferation of the vehicles about the middle of this century generated the first traffic problems in the cities of the western world. The cities were not prepared to assimilate the movement of that many cars. The municipal authorities had to regulate the circulation, having influence on the form that the ancients taxis were offering the services.

In the regulation of the industry of the taxi, it is very important to specify the service level. There exists a relation between the price and the service level, by the demand function. Following Beesley (1983), the dilemma of the regulation agency is to select a price, which implies a level of service, for an universe of users with several preferences about the service level.

One of the most important characteristics in the evaluation of the service level is the waiting time. By waiting time, one means the time that elapses from when a user decides to hail a taxi, until the user is in the vehicle. The waiting time depends on the number of taxis dealing in the industry and the average level of occupation of the industry.

- 2 - 2.1. The taxi

Nowadays, the definition of a taxi is based on some judicial rule that usually establishes its more basic characteristics and the way it is run. In this section we present, in the manner of summary, some of the more usual characteristics, that often appear in the majority of the developed countries.

It is a vehicle, whose capacity cannot exceed a permanent number of seats. This number is in the habit of varying from five to nine, depending on the district where the service is done.

It is a service provided with a driver, that had to fulfil some minimal rules that qualify him to be a professional. Depending on the countries, the restrictions are often qualitative ones. In some others there also exist contingent of the drivers.

It is an authorised vehicle to bid in hiring since the public road, or to park at stops that are equipped to the effect. It usually possesses the privilege of manoeuvring in the special lanes of public masses transportation, since it is considered a service of social interest.

The vehicle is easily identified from the private vehicles, because it is painted in a special way, and because it usually has an emblem that is easy to recognise.

It can take the luggage of the travellers, has no prearranged schedules nor itineraries. This is the reason, that makes them quite different from the regular lines.

They are equipped with a meter that displays the price of the run, according to some price list that it is usually approved of and established by the administration.

They should hold a book of complaints, a rules compendium of the service and the applying price list.

They are not authorised to allow intermittent stops for different customers. The contract of the service is for a fixed destination. Therefore, the agency protects the lines of urban transportation.

- 3 - It can be concluded, therefore, that the taxi is an intermediate service, among the collective transportation and private transportation systems, subordinated by some method of political regulation.

2.2. Regulatory instruments

It can be seen in Beesley (1973), that sometimes it is useful to assign regulatory instruments to three broad classes. Studying different combinations of them, one can predict their effects, analysing different taxi industries, isolated from one another for the different situations that appeared in the markets. Coe and Jackson (1983) tried to shed some light on the question of the implications of the quantity control of local taxi industries in England and Wales, by studying the different degrees of restriction by the district councils.

The important elements of regulation may be tabulates as follows:

• Monopoly rights:

• the conferment of an exclusive franchise to organise taxi services in a geographically limited market area.

• the conferment of exclusive rights to a particular mode of operation.

• Entry conditions:

• requirements for specific factors of production tending to raise the cost of entry.

• control of the number of production units

• Fare control:

• control over the level of fares charged.

• specification of fares structured.

In Spain, as in the majority of the world’s taxi systems, the five last features are combined. It is probably true that no industry in the developed world lacks at least one.

- 4 - The justification for regulation over taxis has been questioned with different points of view. Authors of pro-reregulation affirm that regulation serves to reduce the supply of taxis in general, thereby lowering the level of service provided to the users, lessening competition, innovation and greater efficiency. The system imposes unnecessary restrictions on business, which do not achieve the only purpose for which control is necessary, namely protection of the public interest.

Nevertheless, on the other hand, authors of pro-regulation conclude that some kind of regulation of the taxi industry must be done:

• to maintain standards of quality. It is argued that in the event of a surplus of taxis in periods of recession, the operators most likely to survive will not be those providing the best service. It will be those working the longest hours and perhaps, to stay in business, operators will be forced to run lower-cost, to keep older vehicles more time and to skimp on maintenance at the expense of safety.

• to guarantee an adequate supply of taxis at all times. It is argued that sometimes the industry could lead to lack of availability outside some periods.

• to keep down fares. It is said that, if there is a surplus of taxis, local authorities will see operators regularly going out of business and, thinking fares are too low, permit them to rise.

• to prevent overcrowding at ranks. In many towns and cities the amount of public space is limited, the removal of quantity control would lead to overcrowding of ranks and illegal parking, and therefore to greater traffic congestion in urban centres.

• to ensure efficient utilisation of resources. If drivers are free to drive their own vehicles, all will do so rather than effectively sharing one vehicle between several of them. This could lead to inefficient use of resources.

• to protect investments. Operators that have purchased a license say that they have seen it as an investment to be cashed in when they leave the industry. To wipe out the value of

- 5 - that investment by the removal of quantity control would in essence represent a breach of faith.

2.3. Relevant legislation

The official organisations that assume responsibility for carrying out the regulating rules, are nowadays the Ministry of Transportation and Environment, the distinct Transportation Organisms of the Autonomous Regions, the Public Offices of the provinces, the Public Offices of the Islands, the Prices Organisations and the City council.

The most important legislation of the industry, dates from 1979 and it is ruled in the Real Decreto [793/79], of 16th of March of 1979:" National Rules of the Urban and Interurban Services of transportation of automobiles". The Act [16/1987], of 30th of July: "Arrangement of the Terrestrial Transports", also dedicates a complete chapter to the urban transportation, trying to give an appropriate answer to the participants of the sector: administration, carriers and users.

The most important characteristics of this legislation are:

The municipal competence can extend to every kind of transportation that does not take place on its urban ground, when it affects primarily its municipal interests.

The concession of the licence to offer interurban journeys is under the condition of obtaining a municipal license, and the loss or retirement of this causes the automatic revocation of the interurban transportation authorisation, unless the suitable official (Town council or others) decide its maintenance by reasons of public interest.

The price system of the urban travellers transportation is the responsibility of the the Prices Organisations.

Finally, there exist some specific norms for the urban transportation at special zones or agglomerations, that present serious co-ordination problems at these districts in its transportation net, at zones in which exist interaction or reciprocal influence among the

- 6 - services of transport of several municipalities. In these cases, they can constitute special areas with a greater geographical domain.

One very important issue, yet to be resolved, is the development of competition between hire vehicles with drivers, which include limousines and wedding cars, and taxis. There exists an asymmetric relationship between taxis and hire vehicles with drivers. The taxi can ply for hire, the hire vehicle cannot. The taxi can compete for the market with hire vehicles, but there exists a difference among the restrictions that must satisfy each one. The taxis posses a geographical domain restriction and the hire vehicles have a time restriction, the origin or destiny of a journey made with a taxi must be the city where the vehicle possesses the license, the minimum time of the contract done with a hire vehicle with driver must be four hours. In England it is found that taxis and hire cars are very substitutable, and that where the number of taxis is too restricted, there is a compensatory extra increase in the number of hire cars (Toner,1989). In the Canary Islands, the problem is growing in the trips where the origin or destination is the airport.

In the rules of the regulation, it is established that the municipal authority can concede new licenses if the conditions of the public interest ask for them. The questions that must be analysed are:

1. The quality and the number of licenses prior to the concession of new ones.

2. Character, size, and growth of the population.

3. Authentic necessities for a better service.

4. Effects of the new licenses in the transportation sector, analysing possible congestion problems.

The salaried drivers have priority over the remainder of the rest of the persons that demand new licenses. If there exist more licenses than salaried drivers, the remainder of the licenses are conceded according to the criterion of the authority that confers those. In the last years , this situation has configured some aspects of the way in which the officials make the expedient of concession. The number of the licenses tends to be hard controlled and new licenses are

- 7 - granted when a very loud pressure by part of the collective of salaried drivers exists and the collective of existent licenses agrees to that petition.

The licenses cannot be transferred except in the following cases:

1. Death of the proprietary of the license. The right is transferred the legal heir.

2. If the legal heir cannot exploit the license, this can be transferred in the same manner as it was a new license. In this case, the municipal authority must open a record.

3. When the proprietor of the license has a physical disability.

4. When the owner of the license has worked in the industry for five years without any interruption, he can transfer the license to one of his salaried drivers, with the prerequisite that the driver had been working for one year without any break.

The municipal authority can revoke any license that has not been transferred for some procedure of those that have been described.

Every proprietor of a license is obliged to exploit it. This can be done by themselves or for salaried drivers. The salaried drivers must work only in the taxicab industry. The part time is permitted but the salaried driver cannot work in another job. This rule does not apply to the cities with less than five thousand population.

The municipal authorities are competent in the organisation of the ranks. The ranks are limited in the number of the cars that can be parked. Some cities link the taxis to certain ranks and others input some conditions over periods of time that the vehicles must stay in the rank.

3. Number of the licenses

The guideline that is followed to concede new licenses is based in the ratio of the number of the taxis per one thousand of population. National comparison are made to know the relative position of each city with respect to the average. This ratio must be considered as a first approximation to study what is the supply level, but it is very difficult to conjecture some

- 8 - conclusions with this ratio. It is essential to analyse the equilibrium point, studying the supply, the demand and the factors that have conformed this kind of industry.

In the figure 1, we can observe the distribution of the ratio in the islands of the Canary Islands. The box plot shows the interquartile interval or midrange, which is characterised for the first and third quartile. The center vertical line inside the box reflects the median and the segment is formed by the points that are not outliers or extremes. These points are characterised because the distance to the nearest quartile of the box is bigger than 1.5 or 3 times the distance of the box. The municipalities that appear inside brackets are the extremes and outliers of the variable ratio of taxis per one thousand of population. Gran Canaria and are the islands with more population and they present too the major number of extremes and outliers.

Figure 1. Ratio of taxis per one thousand of population

The supply of the taxis is not homogeneous in the islands. Meanwhile some tourist municipalities get a ratio of more than five, others do not have two. We want to emphasise that is the island where the supply is bigger. In this island, taxis act as a complementary service of a insufficient mass public transportation, the taxi service accomplish an important function of social interest, because of the population can move from one point to another inside the island.

- 9 - In the table 1, a summary of the principal characteristics of the ratio of taxis per one thousand of population is presented, giving the information of each island. Gran Canaria presents the largest range, with San Bartolomé de Tirajana as the municipality with the largest ratio in Spain. It can be emphasised that , in island, is the only municipality with no taxis.

Table 1. Summary of the ratio of taxis per one thousand population

Ratio of Number the taxis Standard Maximun supply of taxis Minimun supply of taxis Islands of per one Deviation municip. thousand populatio n Municipality Supply Municipality Supply

Lanzarote 7 4.3 2.26 Tías 8.87 1.71

Fuerteventura 6 3.55 1.27 5.54 1.84

Gran Canaria 21 2.43 2.43 San 10.14 0.52 Bartolomé de Tirajana Tenerife 31 2.4 2.16 8.03 1.45

Gomera 6 4.94 1.09 Alajero 7 San Sebastian 3.92

La Palma 14 1.93 1.05 Breña Baja 3.58 Puntallana 0

El Hierro 2 2.79 0.36 Frontera 3.05 Valverde 2.54

One consideration must be done in these moments, the taxis licensed is probably the measure most often employed to analyse the trends of the taxi output for different reasons. First, the most natural units for measuring output in the taxi industry - journeys or passengers miles - are difficult to obtain.

3.1. Linear model.

In this section, we are going to estimate and test some general linear model for the number of taxis in the municipalities of the Canary Islands. You can see in the table 2 different models,

- 10 - trying to explain the number of taxis by the population and the importance of the tourism in some municipalities of the islands.

Table 2. Linear models of the number of taxis

Model Estimation Standard t Significance Level error

T=α+βP α=-17 5.49 -3.11 0.00

β=0.045 0.0001 39.85 0.00

T=α+βP+γC α=-24 5.01 -4.75 0.00

β=0.005 0.00 44.74 0.00 0.00 5.08 0.00 γ=0.002

In these models the variables are the following: T=number of the taxis, P=number of inhabitants in thousands and C=number of tourist beds. The coefficients of the independents have the expected signs, being each one very significant. We have obtained R2 of 0.94 and 0.98, respectively.

In the table 3, we present the number of the taxis, the predicted value of the regression and residuals of outliers in the model. The results are presented in two different groups: the overestimate and the underestimate predictions.

The characteristics of each group are very different. The group in which we obtained a prediction greater than the real value contained to the municipalities of medium size, where the population tries to explain more than the real demand. Can we conclude that in these cities the regulation has been more strict? Studying the market value of the licenses will be a better approach to conclude something of this nature.

- 11 - Table 3. Residuals of the linear models

Model T=α+βP Model T=α+βP+γ C

Result Municipality Number of Prediction Residual Prediction Residual taxis

Underestimate Tías 67 17 50 ** **

San Bartolomé de Tirajana 248 95 153 ** **

Adeje 78 27 51 ** **

Arona 148 87 61 ** **

Granadilla de Abona 115 60 55 55 60

Puerto de la Cruz 200 100 100 137 63

Santa Cruz de Tenerife 1087 904 183 894 193

Overestimate Arucas 57 107 -50 99 -42

Gáldar 20 77 -57 70 -50

Santa Lucia 29 135 -106 127 -98

Telde 149 339 -199 329 -190

La Laguna 320 493 -173 485 -165

La Orotava 64 144 -80 137 -73

Los Realejos 47 120 -73 120 -73

The group in which the predictions are under the real value is characterised by the importance of the tourism in the cities, with a municipality -- that possesses the exclusive privileges of plying for hire in the airport of Reina Sofia. For this reason we try to correct the bad effect of this kind of errors by introducing the number of beds of the municipality as a proxy that tries to express the importance for this sector.

- 12 - The second model corrected the effect of the bad influence in the group of the tourism municipalities. Even the prediction that is done in is better. The second group obtained similar results. The relevant aspect of this group was the medium size of them.

In the figure 2, we represent the 95% confident interval of the regression line of the model: T=α+βP. You can see the upper and lower bands around the fitted line.

Figure 2. Regression line of the model T=α+βP with the 95% confident band

4. Cluster analysis

Cluster analysis is the art of finding groups in data. The classification of similar objects into groups is an important human activity. In every day life, this is part of the learning process. Sometimes this discipline is considered as a branch of pattern recognition and artificial intelligence. Basically, the idea consists in that two objects that belong to the same cluster were as similar as they can, and two objects that belong to different groups must be the most different items. In this section, we use this technique to classify the eighty seven municipalities of the islands into seven groups. In this occasion, we are going to characterise the objects with the following measurements: number of the licensed taxis, resident

- 13 - population, number of tourist beds, number of offices and the ratio of taxis per one thousand population.

The results can be observed in the table 4. Three clusters appeared with only one object: Las Palmas de Gran Canaria, and San Bartolomé de Tirajana. These municipalities are the two capitals of the provinces and the municipality with more tourist significance. The cluster number seven is formed by sixty-seven municipalities. It is the cluster with more objects and the municipalities inside it are characterised because they are small towns with little tourist importance. The municipalities that presented more distance respect to the average of the group are: La Oliva y . These are municipalities from y and have a major hotel infrastructure. The second cluster is formed by the two biggest towns after the capitals: y La Laguna. The fifth cluster presented the peculiarity of having the municipalities with more tourist significance after San Bartolomé de Tirajana: Tias, Adeje, Mogán, Arona and Puerto de la Cruz.

Table 4. Cluster analysis of the municipalities of the Canary Islands

Cluster Municipality Distance to Variables Minimum Maximum the group 1 Las Palmas G.C. 0 Taxis 1628 1628 Inhabitants 345877 345877

Tourist beds 12146 12146

Offices 14370 14370

Ratio of taxis-population 4.59 4.59

2 Telde 7517 Taxis 140 320 La Laguna 7517 Inhabitants 77356 110895

Tourist beds 236 1920

Offices 2482 4079

Ratio of taxis-population 1.81 2.89

3 San Bartolomé de 0 Taxis 248 248 Tirajana Inhabitants 24451 24451

Tourist beds 100779 100779

- 14 - Table 4. Cluster analysis of the municipalities of the Canary Islands

Cluster Municipality Distance to Variables Minimum Maximum the group Offices 3050 3050

Ratio of taxis-population 10.14 10.14

4 Santa Cruz de 0 Taxis 1087 1087 Tenerife Inhabitants 200172 200172

Tourist beds 2663 2663

Offices 8724 8724

Ratio of taxis-population 5.43 5.43

5 Tías 3356 Taxis 67 200 Mogán 2900 Inhabitants 7556 25447

Adeje 2602 Tourist beds 26382 41063

Arona 4459 Offices 775 2215

Puerto de la Cruz 6136 Ratio of taxis-population 6.51 8.87

6 5120 Taxis 15 115 Puerto del 2686 Inhabitants 14429 35142 Rosario Agüimes 2844 Tourist beds 0 2520

Arucas 2022 Offices 500 1642

Gáldar 856 Ratio of taxis-population 0.88 6.81

Ingenio 392

Santa Lucia 4736

Granadilla de 2530 Abona Güimar 3611

Icod de los Vinos 513

La Orotava 5668

Los Realejos 3404

- 15 - Table 4. Cluster analysis of the municipalities of the Canary Islands

Cluster Municipality Distance to Variables Minimum Maximum the group 2422

Llanos de Aridane 2886

Santa Cruz de la 2360 Palma 7 Rest of the Taxis 0 40 muncipalities Inhabitants 572 12383

Tourist beds 0 17322

Offices 31 544

Ratio of taxis-population 0 7

5. Conclusions

In this paper we have explored some of the basic aspects that conform the taxicab industry in the Canary Islands. We reached the basic conclusion that the abusive use of the ratio of taxis per one thousand population for granting new licenses is inadequate. For this reason, we claimed that to achieve better results in the industry, we must analyse models of demand in order of comparing the possible results for other schemes of regulation.

Until the officials of the agencies do not employ the necessary data, in a form that necessarily involves sampling taxis’ receipts, it is not possible to resolve questions like the importance of availability or fare in demand elasticities, the cross elasticities for other industries in the overlapping markets: hire cars with drivers, bus public transportation, etc.

We have presented the results of the cluster analysis, trying to shed some light in the industry inside The Canary Islands Community. We have separated seven groups of municipalities that can be considered as seven distinct industries. For this reason, the officials must be prepared in different area of knowledge to establish other kind of regulation. It would be very different to do this task in the clusters of the municipalities with tourism. In these, tourist demand,

- 16 - especially from foreign visitors, will be the most importance source of the runs. In the capitals of the provinces, the negative externalities of the concession of new licenses must be evaluated. The marginal social cost can diverge greatly from the marginal private cost of the taxi drivers.

- 17 - References

Baron. D. and D. Besanko (1987). "Commitment and Fairness in a Dynamic Regulatory Relationship".Review of Economic Studies. 54. 413-436

Beesley, M.E. (1973). "Regulation of taxis". Economic Journal. 83. 150-73.

Beesley, M.E. and Glaister S (1983). "Information for regulating: The case of taxis". Economic Journal. 93 594-615

Caillaud, B. , Guesnerie, R. Rey, P y Tirole, J (1988). "Government intervention in production costs". Rand Journal Of Economics. vol 16 num 1

Coe G.A. and Jackson R.L. (1983). "Some new evidence relating to quantity control in the taxi industry". Transport and Road Research Laboratory. Supplementary Report n. 797

Kahn, A.E. (1988). “Surprises of Airline Deregulation”. American Economic Review 78. pp:316-22

Laffont, J.J. (1992). "The new economics of regulation ten years after". VIII Jornadas de Economía Industrial.

LEG (1979). Reglamento Nacional de los Servicios Urbanos e Interurbanos de Transportes en Automóviles Ligeros. MTTC

LEG (1987). Ley de Ordenación de los Transportes Terrestres. MTTC

Toner, J.P. (1989). "Taxi licensing policy: The effects of the 1985 Transport Act ". University of Leeds. Institute for Transport Studies. Working Paper 273

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