UNIVERSIDADE CATLICA PORTUGUESA

INSTITUTO DE ESTUDOS POLTICOS

The Uber Controversy: a Public

Choice Perspective
Democracy, Public Choice and Economic Analysis of Law
Prof. Andr Azevedo Alves

Anja Benz
Bachelor of Science in Economics University of Mannheim

Eduardo Sumares
Mestrado em Cincia Poltica e Relaes Internacionais

October 30th, 2015

1.

Introduction

This report refers to the news piece entitled Taxi drivers snarl up Brussels in anti-UBER
protest published online by Eurobserver on the September 16, 2015 (attached). The
report will identify and briefly analyze certain key issues of public choice that underlie
the Uber controversy, namely: (1) specificities of collective action - market failure,
government failure and free-riding; (2) interest groups and (3) rent seeking. Due to the
briefness of the current exercise, and for the sake of maximizing analytical content, this
report will, except as otherwise necessary, minimize restatement of the news pieces
journalistic content. The reports concludes by highlighting the interconnections that
weave together the referred key issues in a public choice perspective on the Uber
controversy.

2. Market Failure in Transportation Services

Underlying the Uber controversy is a problem traditionally assumed to plague urban
transportation services: the market failure of imperfect or asymmetrical information. Due
to this shortcoming, the market is, by itself, unable to provide consumers with sufficient
information for an informed selection. More specifically, this traditional perspective
assumes that, in an unregulated transportation market, potential consumers would lack
the adequate means to assess the safety of drivers or their cars. In addition to subjecting
consumers to safety risks arising from a poorly informed selection, this imperfect
information problem also prevents competition from achieving its full welfare-enhancing
potential -- as consumers incapacity to distinguish safe drivers from unsafe ones
eliminates an important incentive for high quality service.

3. State Intervention, Government Failure and the Uber Alternative

As a typical market failure, the imperfect information problem described above has
traditionally been solved through state intervention, namely government licensing. It is
this intervention that creates that category of licensed drivers and vehicles known as
taxicabs. In theory, the licensing of taxicabs solves the imperfect information problem by
clearly indicating to consumers which drivers/cars have been government-certified as safe
to transport people. Thus, the initial taxicab licensing and its periodic renewals serve to
control and monitor the safety of these transportation service providers.
1

In solving the imperfect information problem via the certification of drivers/cars, the
taxicab licensing model, however, tends to generate social costs in the form of
government failures. Among such, one can discern at least two important categories, that
of: (1) market distortions -- most notably the creation of a legal monopoly, price
determination, and entry restrictions often leading to undersupply; and (2) bureaucratic
costs and inefficiencies arising from increased regulation and personnel. In light of such
government failures, it is necessary to evaluate the costs and benefits of the taxicab
licensing model, while keeping in mind that, from a public choice perspective, state
intervention is justified only when its benefits outweighs its social costs.

But state intervention via taxicab licensing is not the only strategy to solve market failures
in the urban transportation market. Novel ways to solve the imperfect information
problem -- by means of informing consumer selection -- have been created by
technological progress, of which Uber is the best known example. 1 Ubers business model
claims to offers a viable alternative to taxicab licensing in guaranteeing to consumers a
safe transportation service. Alike taxi licensing, Uber assesses the safety level of cars and
drivers before entering them into its database; but in addition to such safety clearance,
Uber offers consumers the possibility to rate and review the service, thereby providing
potential customers with a higher level of information for their selection. Frequent
reviews and ratings by previous customers not only better solve the imperfect information
problem, but also offer an additional benefit: they provide incentives for drivers to render
a high quality service or risk being pretermitted by other drivers. The Uber model thus
enhances the competitive dimension to the transportation market, a social benefit largely
lacking in the taxicab licensing model -- and only recently made possible to taxis via taxi
mobile apps.

After considering the aforementioned social costs and benefits arising from state
intervention in the form of taxi licensing, one can, from a service-oriented perspective,
make a strong case in arguing that Uber offers a viable market-solution alternative: not
only does it solve the imperfect information problem without generating the market
distortions and bureaucratic costs that typically arise from taxi licensing, but it also

Uber allows people without taxi permits to sell rides via mobile phone app Uberpop.

enhances competition in the transportation market and increases the social benefits in
connection therewith.
4.

Taxi Drivers as an Interest Groups and its Rent Seeking Activities

The previous section alluded to social costs in the form of market distortions resulting
from taxicab licensing. A public choice analysis suggests that one of such distortions,
namely that of undersupply, may, in some degree, result from the taxi drivers interest
group pressure to protect their income via rent seeking.

Considered collectively, taxi drivers display the traits and respond to incentives that
typically characterize successful interest groups. Among the traits that enable its effective
organization and mobilization are its: (a) small size - even in the largest municipalities
taxi drivers typically amount to more than a few thousand individuals; (b) high degree
of homogeneity - resulting from the small group size coupled with the fact that it consists
in a professional category; (c) sharply defined high-stake interests the safeguarding of
the income derived from their professional activity; and (d) income protective ethic - as
agents in a legal monopoly market, taxi drivers main incentive is likely not to be
increasing their income but reversing its erosion (due to a loss aversion heuristic). All
these traits serve to minimize the incentive to free-riding while increasing the potential
efficacy of sanctions against such behavior. An additional trait, which pertains not to the
taxi drivers group but, more appropriately, to the market where it operates, is the legal
monopoly character of the taxi market -- an encouragement to the pursuit of economic
advantages via regulatory capture. Finally, the broadly dispersed social costs generated
as by-product of the groups activities also contributes to its successful profile.

Not surprisingly, thus, taxi drivers worldwide have often organized as special interest
groups and successfully lobbied local governments to protect their interests. An exterior
factor that contributes to their lobbies success is the difficulty consumers face in
organizing a counter interest group. The large numbers, heterogeneity and widely
diffused low-stakes interests of consumers produce an acute free-riding, incentive - as
any individual effort is discouraged by the sheer vastness of potential co-beneficiaries.

In concentrating efforts and resources on a distributive strategy as opposed to a productive

one, taxi drivers lobbying qualifies as a typical rent seeking activity. Traditionally, one
3

of their major rent seeking goal has been protective2: the raising of entry barriers through
capping the amount of taxicab licenses in their particular municipality. Despite its special
interest nature, the capping of taxicab licenses has often been disguised as a public
interest: the curbing of negative externalities in the form of air pollution and traffic
congestion3. More recently, as attested by the news piece, increased competition by paid
rides have opened-up a new front in the entry restrictions lobby: the outlawing of Uber
and other paid ride apps. One may suspect that the anti-Uber front also disguises the
special interests of taxi drivers behind a mask of public concern, more specifically in
questioning the safety of Uber-mediated rides.4
In addition to the social costs generally associated with rent seeking those arising from
the allocation of resources to unproductive ends as opposed to productive ones5 -- the
lobby to outlaw Uber would, if successful, preserve a specific social cost arising from the
taxi drivers previous rent seeking efforts: the undersupply resulting from the capping of
taxicab licenses. The lobbys success would also reduce competition and incentives for
innovation6, thereby strengthening the taxis legal monopoly7 and preventing consumers
from enjoying a likely better service.

5. Conclusion
The Uber controversy is underlined with key issues of public choice: market failure,
government failure, free-riding, interest groups and rent seeking are but some of the
concepts relevant to its understanding. However briefly, this report has revealed that, in
providing a genuine market solution to a market failure, Uber has the potential to unlock
a virtuous circle in the urban transportation market. Not only does Uber appear to solve
the original problem of incomplete information, it is also not plagued by the typical
shortcomings of state intervention. Therefore, a public choice perspective suggests that,
as a market alternative to the taxicab licensing model, Uber creates significantly less
government failures; market distortions; resource misallocation; or rent seeking. Despite
2

This protective interest applicable also has a prospective dimension, as it serves to appreciate the value
of taxicab licenses in the secondary market.
3
OECD Policy Roundtables (2007).
4
A Brussels taxi driver quoted in the news piece stated: I wont send my child on an Uber
5
Improve customer experience. Invest in technology. Innovate the business. All things the taxi sector could
do instead of strike. said Belgiums deputy prime-minister, Alexander De Croo.
6
The law should be adapted to allow competition and innovation said the general manager of Uber
Belgium, Filip Nuytemans.
7
Filip Nuytemans added that: Taxi drivers are trying to protect their monopoly

the taxi drivers vehement protests, or, ironically, because of it, Uber competition would
most likely be uber good.

6. Bibliography
Butler, E. (2012). Public Choice A Primer. London: The Institute of Economic Affairs.
Mueller, D. (2003). Public Choice III. New York: Cambridge University Press.
OECD Policy Roundtables. Taxi Service: Competition and Regulation. (2007) Available at:
http://www.oecd.org/regreform/sectors/41472612.pdf
Teffer, P. (2015, Sept. 16) Taxi drivers snarl up Brussels in anti-UBER protest. Eurobserver.
Retreaved from: https://euobserver.com/connected/130292