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International Business Uber’s success signals need to fix flawed taxi systems in Canadian cities

At a glance, Uber's assault on the taxi business seems like a classic case of a disruptive technology threatening an entrenched and backward industry.

The San Francisco-based ride-sharing service loves to mock its detractors as misguided Luddites, resisting the march of progress.

Protesting taxi drivers played the part perfectly when they smashed an Uber car near Paris' Charles-de-Gaulle Airport earlier this year. It hasn't come to violence in Canada, but the service is facing a raft of legal challenges from angry taxi companies and nervous regulators.

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Uber's smartphone app, which uses GPS technology to match up customers and nearby drivers, sure beats waiving your arms in the air on a cold street corner.

But the significance of the Uber phenomenon is less about disruptive technology than it is about a regulatory failure, which is stifling competition and causing artificial shortages.

Uber's success rests on exploiting regulatory weaknesses. It's reminiscent of the Canadian pizza chain that imported U.S. pepperoni-and-mozzarella ingredient "kits" to skirt the 245 per cent tariff on straight cheese that protects the supply management regime.

Most Canadians have bad cab stories to tell – cars that don't show, high fares and long waits outside bars after last call or the end of a hockey game.

The crux of the problem is that cities use a rather blunt instrument to control entry to the industry – licences. The number of licences has fallen badly out of line with demand.

There are now chronic shortages of taxis in many cities and neighbourhoods. In Vancouver, there are roughly 10 taxis for every 10,000 people. The comparable figures are 19 in Toronto and 15 in Ottawa, according to estimates compiled by Ottawa economist Dan Hara, who specializes in the taxi industry. That compares to more than 100 per 10,000 in Washington, D.C.

The mismatch between supply and demand has also created a thriving secondary market for cab licences. In Toronto, for example, plate licenses fetch anywhere from $300,000 to $400,000. In Vancouver, Canada's most underserved taxi market, the going rate is even higher.

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"Almost all large Canadian cities are facing a crisis in terms of how we regulate taxies because of shifting demographics," Mr. Hara said. "The population is getting older, and people are being more responsible about drinking and driving."

But the dearth of taxis doesn't tell the whole story.

In many cities, the problem is peak load times, when demand far exceeds supply, rather than too many taxi permits. Think of closing time on Friday and Saturday nights, or the end of a big concert.

"The gap between peak and off-peak is getting bigger," Mr. Hara said. "It's kind of ham-handed just to set a total number of taxis. During different periods of the week you need different numbers."

There are also geographic dead zones, in outlying and suburban neighbourhoods, where cabs are scarce because drivers don't want to go there. Meanwhile, there may be long lines of empty cabs idling outside downtown bank towers.

There are other obvious regulatory flaws. Taxis may be prohibited from picking up passengers in neighbouring cities, or at airports. The result are dead-end cab rides and wasted fuel.

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A 2007 study by the Organization for Economic Co-operation and Development concluded that removing or loosening the "supply" of taxis would lead to reduced wait times, higher customer satisfaction and often, lower prices.

In November, Canada's Competition Bureau urged municipalities to loosen their regulatory grip, rather than banning ride-sharing and digital dispatch services such as Uber. "These innovative business models have the potential to offer benefits to consumers through more competition, including lower prices, greater convenience and better service quality," the bureau said.

Stuck with a flawed system, regulators have found it hard to unwind a regime that largely benefits the taxi industry and hurts consumers.

There are tentative signs of movement. New Toronto Mayor John Tory has called for modernizing regulation, rather than banning Uber. Vancouver is looking at issuing new part-time licences to deal with the peak-load problem.

There may be other ways to expand the supply of taxis. Cities could set strict service standards, and issue new permits when the industry fails to deliver. Or they could lease additional taxi licences, at the prevailing market price.

It's time to fix a system that inadvertently encourages car use and drunk driving, and disadvantages the suburban poor and seniors.

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