This is what happens when governments interfere in the marketplace

Victorians could be slugged a $1-a-trip tax in taxis, hire cars and ride-sharing vehicles, as the state government tries to compensate existing taxi owners for the business they have lost to Uber.

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The Age reports that Public Transport Minister Jacinta Allan presented a plan to deregulate the industry to colleagues on Monday, saying the state government was prepared to buy back taxi licences, according to News Corp.

If the government were to pay for licences at current market rates – about $150,000 – it could cost taxpayers about $800 million.  And the State government is not going to raise that in the short term by charging taxi uses an extra dollar a trip. It is going to take quite a while. According to the Australian Taxicab industry Association there were 42 million passengers in Victoria in 2014. So it will take roughly 20 years to pay off the debt and that without calculating interest.

Now buying back the taxi licenses at $150k will not compensate the people who paid out close to $500k at the peak of the market. But there are a couple of things that need to be considered here about the principle.

The first is that people who bought taxi licenses were often not buying them to run a taxi service. They were paying very high prices as a speculative investment. They had seen the price of taxi licenses increase over an extended period of time and their accountants had told them it was an excellent investment. ” Buy a taxi license, lease out the cab, sell the license for a  (handsome) profit when you retire.”

It was a business decision, a poor business decision as turns out, but a business decision nonetheless.

The second consideration is the reason that these speculative gains were on offer was that the government  restricted the number taxi licences thus forcing up the market price and the attractiveness of taxi licenses to speculators.

Now, the Victorian taxi users are being asked to provide a partial bailout for the people who wished to cash in on this  artificially  induced government restricted supply situation. It was completely understandable to invest in the taxi license market, it looked like a good deal and for many people, those who got out in time, it was.

But the fundamental problem is that when a government intervenes in the marketplace by restricting a good or commodity that is in demand (such as taxi licenses), it will artificially force up prices and make that market attracted to speculators. When the market conditions change, as as happened with the arrival of  government-sanctioned Uber, the speculative conditions in the marketplace change and people (often financially gullible or naive people) lose a lot of money.

But should the taxpayer or in this case the taxi user compensate these investors for poor investment decisions and for taking the advice of accountants who didn’t advise them properly?  The hardhearted answer is probably, no.

Now the people who use taxis are being asked to foot the bill. Wouldn’t it be more appropriate to ask the people who use Uber to cough up a bit extra?

Or perhaps even the global ride-shared giant Uber by telling them there is a price for entry into the Victorian taxi market: it’s $800 million in compensation to taxi license holders.

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Uber’s new headquarters in San Francisco: clearly doing well

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