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A Mandate to Be Inefficient

This week, the U.S. Supreme Court delivered a decisive blow to Mayor Michael Bloomberg‘s plan for New York City taxicabs to go green, to switch to hybrid cars.? This all started a few years ago when Bloomberg announced a plan to mandate that the famous New York City taxi fleet go all-hybrid.? The classic Crown Victoria gets about 12 miles per gallon, whereas a hybrid taxi gets 30 miles per gallon.? Quite a difference!? So this is great for the environment.
A bit of background may be helpful: taxicab drivers save about $15.00 per shift in gas with a hybrid compared to a Crown Victoria, but hybrids cost fleet owners around $7.50 more to buy and maintain. So it makes economic sense to have hybrids. But the city government sets a maximum lease rate, the maximum amount a taxi owner can charge a driver to drive the taxi for half a day. Why does this matter? This maximum lease rate means that the owners cannot charge more to the drivers to recoup their extra cost of owning and maintaining a hybrid.
The Federal Courts shot down Bloomberg’s must-go-hybrid mandate a few years ago because it violates the United States Clean Air Act (ironically!), which allows only the federal government to set fuel efficiency standards.? So then Bloomberg tried to introduce two-tiers to the maximum lease cap: there would be one higher tier for hybrids and one lower tier for the Crown Victoria.? Unfortunately for Bloomberg, and for the environment, the term “mandate” here is a legal term, one that is judged by what people actually will do, not what they are allowed to do.? If an incentive is so big that almost everyone does it, then legally this is considered a mandate. Just yesterday the Supreme Court of the United States refused to hear the case, thus letting stand the lower court’s decision.
The deep irony that seems to have escaped the policy discussion is that the current maximum lease rates are somewhat a mandate too, but a mandate to be brown!? Since the maximum lease cap is binding, taxicab owners are not able to charge more to recover their costs of owning a hybrid. So in a free market the hybrid would be more profitable, but with the cap in place the Crown Victoria becomes more profitable for the owners (note that about 1/3 of taxis are now hybrid, but I think that number would be radically higher if there weren’t incentives to go brown). Encouraging fuel inefficiency is not what Bloomberg and the city government want to be doing, but they are. Why is this?
The frustrating fact is that both taxi owners and drivers would actually prefer to go green, if given the chance to let incentives work their magic. But there is a basic market failure here, generated by price regulation.? It is a classic case of a positive externality (the savings on gasoline costs for the driver) that could be internalized (by drivers paying the owners a bit more).? In economics jargon, this is just a simple matter of letting the Coase Theorem come to life … let people come together without regulation and the efficient solution can be found (read here for a 2007 Freakonomics article on the Coase Theorem). So why can’t we get this right?
One might suggest that the lease caps should simply be set precisely so that they cover the exact cost of operating a hybrid.? The problem here is one of stickiness and precision.? Changing lease caps is a cumbersome process, yet technology changes rapidly.? A system which kept lease caps in place but got this right would need constant updating to take into account changes in operating costs (which influence the relative costs to fleet owners) and changes in fuel efficiency (which influence the relative benefits of hybrids to the drivers).? This would be an exercise in futility, and nonstop bickering.
This is one of those nice situations where basic free market economics and the environment are perfectly aligned.? The current lease caps get the incentives wrong, and are ironically a de facto mandate to be fuel inefficient.? So let’s make our taxicabs green the easy way, by removing lease caps and freeing the markets.
What do you think?