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Taxi Incentives

Whether they show it or not, most passengers are suspicious of taxis. This is because there is a conflict of interest: needlessly roundabout routes drive up the taxi's profits, while they cost passengers time and money. Is there a way to line up the incentives of drivers and passengers?

The solution is to pay taxis before the ride, not after. The cost would be based on the distance and the traffic situation. This pre-paid method would be better than the current after-pay method for three reasons.

First, it would be in the best interest of drivers to take the passenger to his or her destination as soon as possible so that they can quickly find a new customer.

Second, because the passenger knows this fact, there would be fewer arguments about the route the drivers take. A driver's mistake in taking a slower path could be mildly annoying for the passenger, but not irritating enough to incite major arguments. Passengers would also trust the drivers more when they claim that they know a faster route.

Third, there would be less traffic. This positive externality would arise because the fare would depend on the traffic situation (the heavier the traffic, the larger the costs in taking a taxi). When showed the higher costs, passengers would be more likely to take public transportation.

Granted, passengers are more likely to take public transportation even without the prepayment system, since they know that taking taxis during rush hours could be costly. But explicitly displaying the higher costs could deter a lot of passengers from taking taxis. And because the taxis know that it would be harder to find passengers during rush hours, they would be more inclined to take some time off, or at least stay away from congested areas of the city.

One possible benefit for drivers is that when passengers call for a taxi, they could bid up their prices. When taxis are much needed, for example, during stormy weather, passengers who have a higher willingness to pay could offer a higher price. This first degree price discrimination is beneficial to everyone, since the people who most need taxis would get them, and taxi drivers could increase profits. This is much more efficient and civilized than lining people up, or having taxis stop for people who most aggressively flag them down. Some may argue that this would not be fair for the less wealthy. In my view, taxis are a luxury good, and those who cannot afford higher costs of taxis on a rainy day always have the option of taking the subway.

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