This issue involving Uber, Grab and the Land Transportation Franchising and Regulatory Board (LTFRB) has caused quite a stir recently, as people protest a seemingly heavy-handed intervention in the workings of a free market. Indeed, government intervention becomes warranted when there is market failure, a situation where unregulated markets are inefficient because prices fail to provide proper signals to consumers and producers.
A perceptive student of economics should ask: “Where exactly is the market failure in this issue? Is the LTFRB justified in its aggressive pursuit of violators?” This essay attempts to tackle these questions.
As economic theory goes, there are four sources of market failure: 1) imperfect competition; 2) public goods; 3) externalities; and 4) imperfect information. It would be instructive to see how this recent issue relates to each source.
In imperfectly competitive industries, some firms influence price and competition. Output is lower and price is higher than they would otherwise be under perfect competition.
Clearly, Uber and Grab have given commuters a desirable alternative to taxis that refuse to take rides during peak hours when commuters need them the most, or take rides selectively at a negotiated premium. In the absence of alternatives, rushing commuters fall prey to unscrupulous taxi drivers exercising market power, but because of transportation network companies (TNCs), such predatory behavior is now tempered somewhat.
Nevertheless, the traditional taxi industry is aggrieved by the surge in popularity of TNCs, so one must still consider the welfare of workers in this industry. Since regulating competition is part of its job description, the LTFRB argues that it is simply ensuring a level playing field, so they must go after colorum Uber and Grab drivers.
Market failure could also come from the existence of public goods that bestow collective benefits on members of society. Public goods are nonrival in consumption, and their benefits are nonexcludable. Being nonrival in consumption means that one person’s enjoyment of the benefits of a public good does not interfere with another person’s consumption of it. Being nonexcludable means that once the good is produced, no one can be excluded from enjoying its benefits.
Strictly speaking, public transport entails some cost that opens up the possibility of exclusion. By and large, an efficient public-transport system can have the characteristics of a public good if it enables people who cannot afford cars to avail themselves of much cheaper travel alternatives.
With the problems surrounding the Metro Rail Transit and Light Rail Transit (LRT), it should be obvious why commuters prefer to take Uber and Grab.
Externalities are costs or benefits imposed on individuals who are external to market transactions. If social costs or benefits are overlooked, the decisions of households or firms are likely to be inefficient.
TNCs have introduced carpooling, which can save fuel and reduce negative externalities from congested roads and air pollution. Carpooling offers a win-win solution, as both driver and rider are better off, and the environment stands to benefit with reduced private car usage.
However, because Uber and Grab could be quite lucrative, enterprising Filipinos might be tempted to purchase fleets of cars with the intent to operate them with hired drivers, and so the LTFRB has decided to regulate their numbers, lest they contribute further to traffic congestion.
Market efficiency also depends on whether buyers have perfect information on product quality and price, and firms have perfect information on input quality and price. Imperfect information can lead to inefficiency.
Imperfect information could lead riders to pick discourteous drivers, or worse, drivers with criminal intentions. TNCs have managed to address this problem through their feedback system, which allows customers to rate drivers so that others would choose the good and avoid the bad.
To be fair, the LTFRB has a feedback mechanism through an online complaint form, but it only captures complaints. It is unclear whether any further action is taken. TNCs are clearly far ahead in dealing with customer feedback, although the LTFRB wants to have all Uber and Grab cars duly registered for the safety of commuters.
Thus, the two main arguments that are used to justify the aggressive pursuit of unregistered Uber and Grab cars are the level-playing-field argument and the public-safety argument. While the intentions are good, others give strong counter-arguments. One is that despite the willingness of TNCs to comply with registration requirements, the LTFRB made it practically impossible for them to do so. Another counter-argument is that the LTFRB aggressively demands safety from TNCs, without applying the same standard to taxis that are seen as more problematic.
It seems the benefits introduced by TNCs far outweigh the costs, so perhaps, the LTFRB should consider striking a compromise with these companies. The one-stop shop for Uber and Grab registration is certainly a step in the right direction. Ultimately, consumer welfare should be paramount in this discussion.
Ser Percival K. Peña-Reyes is a faculty member of the Ateneo de Manila University, Economics Department.