Daniel Sutter: Technology, sharing and regulation

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The ride sharing company Uber has used technology to evade law enforcement in cities where its service was not approved. The case raises several interesting questions, perhaps most importantly involving the future of the sharing economy. Uber has battled entrenched and regulated taxi companies. Hopefully these battles will not distract or stall the unleashing of the enormous potential of sharing to improve our lives.

Uber connects people willing to pay for rides with people willing to provide them using their own vehicles via a smart phone app. The company performs background checks on drivers, sets prices, but does not own vehicles. Driving strangers for a fee sounds like taxi service, which is why Uber has run afoul of taxi regulations.

Police in cities where Uber is illegal have tried sting operations to catch drivers, but have been frequently “greyballed,” as reported by the New York Times. Uber’s technology does not just suspend the account of a questionable rider. Instead, it lets the rider line up a ride, but then cancels the ride. The same thing happens again if the rider puts in another request. The technology has been adept at identifying law enforcement accounts

Greyballing has helped Uber enter new markets without permission and build up loyal riders, who then push for legalization. The company has admitted to and agreed to stop using greyballing to evade law enforcement where its service is not legal.

Before condemning the technology, Uber has good reasons to block certain people from hailing rides. Consider a rider banned from the service for abusing drivers. The banned rider can always create a new account, so Uber cannot actually “blackball” a rider. If the new account is canceled, the rider could create yet another account, which might slip through. Letting a banned rider wait for rides which never arrive can better prevent misbehavior.

How one evaluates Uber’s evasion likely depends on one’s assessment of taxi regulation. Economists have publicized the costs of taxi regulation for decades. Taxi regulation uses medallions for legal cabs. Cities limit the number of medallions, allowing taxi companies to charge higher fares than under competition. Regulation also sets maximum fares, but rates generally allow taxis to earn significant profits.

The price of medallions on the market shows the profitability of regulated taxis. The medallion is just a legal authority and does not help provide rides, and thus differs from the cars, gasoline, tires, maintenance, drivers, insurance, and dispatchers that provide transportation. The value is due to profit, and medallions in New York City sold for $1.2 million prior to Uber’s emergence.

Cities have enabled taxi cartels that charge customers more than necessary. If you believe that taxi regulation rips off consumers to enrich cab companies, you might agree with libertarian Jeffrey Tucker’s characterization of greyballing as a “public service.”

Indeed, Uber’s app has eliminated the economic rationale for taxi regulation. Before the internet and smart phones, travelers had difficulty accessing information about reliable cab service in unfamiliar cities. The greater potential for passengers to get ripped provided more justification for government regulation. The market no longer needs government assistance.

Using technology to bring down taxi cartels that have proved impervious to reform is attractive. But I often emphasize respect for the law, and thus am conflicted about undermining laws which we have been unable to change through the political process. I think that peoples’ obligation to obey the law places a duty on politicians to only enact or maintain laws that serve the public interest. We should expect respect for the law to decay when politicians pass laws enriching some citizens at the expense of others.

Reasonable people may disagree about whether Uber is on the side of the angels in battling taxi cartels. But this ultimately is a separate issue from capturing the economic value in cars, homes, jet skis, power tools, and clothes which do not get used frequently. I just hope that Uber’s fight against taxi regulation, which might end badly for the company, does not sidetrack the sharing economy.

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Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

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