Saturday, September 29, 2012

Economics (and economic ignorance) at work

In this story, we learn that Servant Cab in Lincoln, Nebraska--until very recently, the only cab operator in the city--apparently provided poor services, long wait times, and high prices to the residents of its town. When it tried to expand to the rest of the state, the government forbade it, based on widespread testimonies of its ineptitude.

From the fact that this inquisition was held in the first case, we can determine that Omaha restricts entry into the taxi cab market. Servant Cab was, for a time, a de jure and de facto monopoly in Lincoln. Basic econ tells us that principle monopoly behavior is to restrict output and increase prices--exactly what Lincoln citizens complained about.

The government commission that caused this unfortunate state of affairs punished Servant Cab for doing exactly what anyone paying attention in a freshman econ class would tell you they would do.

Perhaps it's not economic ignorance at work. Perhaps the local politicians know this and are trying to use punishment rather than price competition to pressure Servant Cab into giving good service. It's possible, but it can't possibly be as effective. The complaints necessary for a legal complaint take a long time to appear, the competitive price of an industry is typically only realized in a state of competition, and after being given legal rewards Servant Cab can return to poor service with no consequences.

Of course, monopolies aren't the only businesses with poor services and long wait times, but they do seem strongly overrepresented. Remember this when someone claims economics is more a religion than a social science and has no predictive power.

HT Radley Balko

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