OLR Research Report

April 19, 2004





By: Kristina Sadlak, Legislative Fellow

You asked for general information on taxicab deregulation, and whether the experiences with deregulation have been favorable or unfavorable.


According to several published studies, the effects of deregulating the taxi industry in United States have varied significantly, depending on local markets and conditions, but have generally been unfavorable. Regulations governing the taxicab industry vary by state but typically cover entry, fares, and service. Usually, (1) industry entry is restricted based on certain considerations such as need or the ratio of taxicabs to population, (2) rates are prescribed, (3) companies must meet certain service standards such as 24-hour availability, or (4) taxis must meet health and safety standards. These regulations typically make entry into the taxicab industry difficult.

But, several studies, including a 1993 Price Waterhouse study, found that overall, in many cities that deregulated, the supply of taxicabs increased, fares increased, service quality declined and there were more trip refusals, lower vehicle quality, and aggressive solicitation of customers resulting from a higher supply of taxicabs. There were only minor improvements in availability. As a result, many cities have since re-regulated. This report describes deregulation experience in Indianapolis, Seattle, and St. Louis.


Taxicab regulations are not uniform across the country, but typically address similar issues as market entry, routes, service schedules and continuity, fares, and service and safety standards. The regulations are usually aimed at preventing an oversupply of taxis and providing convenient, affordable, and safe service. Several cities restrict market entry by limiting the number of available licenses, placing a moratorium on new applications, or establishing a difficult application process. For example, in some cities, if someone wants to start a new taxi company, the regulating entity must first hold a public hearing and the applicant must prove the demand for more taxicabs. A 1993 Price Waterhouse survey of 25 cities showed that 10 placed limits on the number of taxis (cited in Sam Staley, How Cities Put the Brakes on Taxicabs, 1998).

In order to ensure safe service and service quality, many cities have regulations that address such areas as driver insurance and licenses. Usually, drivers must have adequate insurance, hold a valid drivers' license, have no criminal record, and have frequent vehicle inspections. With regard to service quality, regulations address such areas as proper driver conduct, vehicle appearance, cleanliness, hours of service, or service locations. Some cities set requirements for the minimum number of taxis per firm; requirements for service 24 hours per day, seven days per week; requirements for separate dispatch offices for each firm; and limits on the maximum age of taxis.


Those who argue in favor of deregulating taxi and livery services generally have made two arguments. These are (1) that deregulating these industries would allow more providers to enter the market and (2) that vigorous competition among providers would improve service and lower its cost to the consumer.

With respect to market entry, deregulation proponents point to restrictive regulatory practices that allow those with operating authority to make the process of new providers entering the market excessively time consuming and expensive. Generally, operating entities are given the opportunity to challenge a new provider's application for operating authority as unnecessary and unsupported by the market. Deregulation proponents argue that this deters many small but capable and enthusiastic competitors. Deregulating or partially deregulating the market entry process would allow small and large companies to compete for business or establish niches in the market that they might serve most effectively.

The second deregulation argument essentially flows from the first. It is that these industries, and in particular the taxi industry, suffer from a lack of price and service competition that exists in other business climates and that this condition is encouraged by regulation. Deregulation proponents argue that deregulating these businesses would promote a more openly competitive environment and that this inevitably results in price as well as service competition. Both, they argue, provide consumers with the opportunity to choose between services that fit their needs or pocketbooks rather than them being dependent on a service provider with a monopoly on their business.


The actual results differ in each city. Overall, several studies have found that taxicab supply increased dramatically, particularly at airports already over-served by existing taxicab companies. Price and service competition was eliminated by first-in, first-out taxicab stands. Response times either remained unchanged or decreased, fares increased in every city, and short-haul trip refusals increased (Cascade Policy Institute, An Economic Analysis of Taxicab Regulation in Portland, Oregon, 1998). Price competition usually does not occur with deregulation since consumers do not “comparison shop” when searching for a taxicab. Instead, taxi fares usually increased with deregulation because the higher supply of taxis caused drivers' earning potential to decrease.

Other common results of deregulation include more highway congestion, higher energy consumption and environmental pollution, less driver income, and little or no improvement in administrative costs (Paul Stephen Dempsey, The Revolving Door: Taxi Industry Regulation, Deregulation & Reregulation: The Paradox of Market Failure, 1996).


Indianapolis deregulated by eliminating the cap of 393 taxicab licenses, eliminating the 24-hour dispatch requirement, allowing companies to operate part-time, and replacing a set fare with a maximum fare. In the first six months of deregulation, 32 companies started up, of which three quarters were owned by minorities or women. Also, pick-up rates were 12% lower for new companies compared to existing companies, average mileage rates were 3% lower, and the average rate for the first mile was 7% lower (The Buckeye Institute for Public Policy Solutions, Taxicab Regulation in Ohio's Largest Cities, 1996).


Seattle deregulated in 1980 by eliminating (1) the provision that based the number of taxicab licenses on the population and (2) fare controls. Deregulation resulted in a high supply of taxicabs, variable rates, price gouging, short-haul refusals, poor treatment of passengers, and fights at taxicab stands at airports. As a result, Seattle re-regulated in 1984, reinstating a restriction on taxicab licenses and fare controls (The University of Leeds Institute for Transport Studies, Taxi Deregulation: International Comparison, 1998). Another study found that the oversupply of taxicabs resulting from Seattle's deregulation reduced individual drivers' earning potential, increased fares, and lowered the quality of service (Nelson/Nygaard Consulting Associates, Making Taxi Service Work in San Francisco).

St. Louis

Deregulation produced a 35% rise in taxi fares, and taxicab drivers complained of waiting hours at airports for customers at taxicab stands. Taxicab companies claimed they increased fares in order to make up for lost competition resulting from the increased supply of taxis. Tourists and airport officials reported a decrease in service quality because of deregulation. As a result, the St. Louis City Council froze new taxicab licenses in 2002 (International Association of Transportation Regulators, The Regulator Vol. 9, Issue 4, 2002).


One study suggests that the goals of deregulation can be achieved with partial deregulation, through reducing the requirements for market entry and deregulating prices. The study proposes that entry should still be regulated, but requirements for entry should be limited to having a valid drivers license, vehicle insurance and registration, and a safety certification. Deregulated prices and fewer standardization requirements would purportedly encourage more innovation and lead to an overall improvement in service quality, as drivers and companies would attempt to engage in price competition by making their taxis more distinct and appealing to consumers (Cascade Policy Institute, An Economic Analysis of Taxicab Regulation in Portland, Oregon, 1998).