A Nissan Motor Co. NV200 Taxi cab. Photographer: Kiyoshi Ota/BloombergKiyoshi Ota/Bloomberg
Combine a rush-hour transit meltdown in Canada's largest city with a downpour, and you have not only the ingredients for an economic experiment but a lab in which to conduct it.
When Toronto's subway system shut down for 90 minutes on Monday morning, stranded commuters – the service carries more than a million people a day – scrambled for alternatives.
As heavy showers lashed the city, the call centres for local taxi companies were quickly overwhelmed. And the popular ride-share service Uber saw its "surge pricing" send fares up to five times the usual rate.
Such high prices may seem offensive. But Monday's events were a textbook demonstration of how markets are supposed to work. The price spike sent a signal that demand was high, and profits were available to those who could meet it. Such a signal normally leads to the creation of new supply – which lowers prices, bringing the market back into balance. Or at least that's what would happen, if regulations restricting the supply of taxis didn't exist.
The TTC breakdown demonstrated the limits of the cab industry model and how asinine it is to maintain a regulated monopoly on getting around. The qualification for operating a taxi in most cities has less to do with safety, service and skill than it does with acquiring a coveted municipally issued licence plate (in Toronto, worth hundreds of thousands of dollars).
Instead of rationing the supply of officially sanctioned taxis, cities should be embracing a wider array of choices. Consider: Car owners have invested tens of thousands of dollars in a fast-depreciating asset that typically sits idle 23 hours per day. Must they remain idle? Because if someone needs a lift, it's now easy to match them with a car and driver. Economically efficient, too.
How should we expect a free market to respond to a subway system breakdown, leading to a shortage of taxis, leading to a spike in prices? Lots of cars would spring into action, and offer to pick up a paying customer. Which would put downward pressure on prices. It's Econ 101 in action, and we'd all be better off if this market experiment were allowed to continue.