A Flat Fee Suffices

http://bleongcw.typepad.com/simple_is_the_reason_of_m/2007/12/a-flat-fee-suff.html

December 05, 2007

On Taxi Fares in Singapore Recently, the news media discuss the issue of a cab fare hike as the cab drivers are complaining of rising operational costs. A member of parliament has recently suggested to further increase surcharges during peak hours as a possible solution. That solution does not solve the present problem but instead exacerbate the crisis to a new level. The problem with his proposal is that the increase of surcharges will lead to further abuse from the taxi drivers during the peak hours. Instead, the better solution is to get rid of all the surcharges and instead impose a higher flat fee (say S$5-S$6) that can solve the problem for both the taxi drivers and the customers. Of course, the other thing is that LTA and the taxi companies must understand why surcharges are failing currently in Singapore.

Here is the problem cut down into one paragraph in simple economics. There are many customers during the peak hours and there are finite number of taxis. In order to create incentive for the taxi drivers to fetch customers, the taxi companies increase the surcharge and the number of taxis after clearing permission from the Ministry of Transport. Strange enough, till today, people are still complaining. Consider the following information, the taxi companies are continuing rolling out more and more taxis but the number of complaints has not gone down at all. One can infer that there is a missing gap between both the taxi operators (taxi companies, cabbies) and customers.

Why is it so, you may ask? First of all, the taxi drivers gave excuses for not fetching some people because the distance is too far. For example, a taxi driver finds no incentive to drive someone up from the city to Jurong because he would have difficulty finding an customer such that he can enter back into the city. So, as a result, most drivers, after sending their first customer out of the city, are wasting time hovering around the town areas like Jurong, Ang Mo Kio, Pasir Ris and Yishun. The problem for the taxi drivers, given their lack of education, is that they actually believe that they are worse off driving back down to the city and pick up another passenger than to hover around the area. Most cab drivers don't realize that driving around Jurong to find a customer in wee hours costs more fuel than immediately driving back to Boat Quay or Clarke Quay to pick up another. So, the surcharge model fails because it does not address the taxi driver's nuances about wasting fuel. Whereas, a higher flat fee solves the problem by paying the cab driver upfront fees that help him to sort out operational costs.

Second, the surcharge system is abused blatantly. During peak hours, you are likely to get a SilverCab or a SMRT cab than getting a Comfort-Delgero cab (both the blue and the yellow ones). The reason is the phone booking system and the surcharges. Since the blue and yellow Comfort cabs make up the bulk of the taxi population, the tendency is for a rogue taxi driver to sit out and wait for the phone call so that he or she can earn a few dollars more. In fact, the cab drivers made it blatant to have their supper between 10.30 to 11.30 pm such that they will pick up all those poor people waiting outside Clarke Quay after that time with the surcharge. The way how taxi drivers are gaming the system is just the economic behaviour of perverse incentive. To deal with that problem, we don't give privileges and instead force them to compete by giving everyone a level playing field with a higher flat fee.

So, is there a possible solution to the problem to solve both problems? Yes, the solution is simple - take away the surcharges during peak hours and force the taxi drivers to compete fairly. By doing that, you reduce the chances of bad behaviour and reward good behaviour. Unless the taxi companies and LTA decide to adopt some economic sensibility, otherwise two things will happen in the long run: one, more people will buy cars if they can afford it and stop using taxi cabs and two, getting a continuous stream of complaints every day.