Lemonade, Taxis, Victims and a Comment Rescue or Two

In a recent post by Tod about privilege, a discussion emerged regarding the role of government in providing privilege via the enforcement of monopolies. As noted, such privilege does not just belong to the initial rent-seeker, but also to anyone who subsequently decides to purchase that monopoly, that privilege.

These people asked for no favours from the government, they just recognized the game the government was playing, learned the rules and decided to play along. The question then arises, is it fair for the government to suddenly remove that privilege, to pull the rug out from underneath these people? Regular commenter Roger spells this out using a hypothetical lemonade stand:

I find this a fascinating topic. Once privilege is granted, it can often cement itself into society. An example: A lemonade salesman lobbies (unfairly) for monopoly status as the only permitted peddler of lemonade in town. He then sells his business at fair market value to a fine and fair minded citizen. Now we have a situation where the fair minded person will be harmed by the loss of privilege (the loss of monopoly).

The point being that once privilege is granted, it becomes hard to take it away. Incumbents of privilege may actually have something to lose. They were just playing by the rules at the time, changing the rules mid game can actively and, from their perspective, unfairly harm them.

From this scenario, my mind jumped to a real world example where this very matter is wrestled with, the taxi market. And specifically, the taxi market in my hometown of Ottawa. As I wrote elsewhere*, the Ottawa taxi market is a mess. The city has decided to issue a specific number of taxi plates, thus limiting the number of cabs that can roam the streets of Ottawa. The city is pretty under-served in terms of taxis, thus cabbies (or, more likely, cab companies) can reap some pretty decent profits. As a result, the taxi plates are quite valuable, and a grey market has emerged on which the plates will be bought sold at prices in the five or six digits.

Recently, there has been a little more talk of opening up the market, but the combination of a city council that tends toward the technocratic and a very influential taxi lobby has ensured that no meaningful reform is on the horizon. But what if, as I propose, Ottawa opens up the market. There will likely be financial hardships for those who bought there way in to the monopoly**, but have not held the plates long enough to recoup there investment. Is it fair to them to suddenly take away their expensive privilege?

In the comments thread of that post, there is some back-and-forth about this. Would these people who never lobbied for monopoly status but were willing to buy into it be considered victims? Have they been harmed? Addressing this point, commenter Jamez Aitch argues:

It’s true that the lemonade seller shouldn’t have had the monopoly privilege, but the point of Rogers’s post is that he has done nothing wrong, hasn’t even sought out that privilege (Roger made him the second owner to keep him “innocent” for purposes of discussion). He’s made a good faith investment, so the rules change does in fact harm him.

I see where James is coming from here, and I’m generally sympathetic to this argument, but there’s something that just doesn’t sit right. I think it’s the use of the word, “harm”, and this isn’t just semantic issue. The paragraph suggests that harm is done to this secondary lemonade seller. He is adhering to the rules of the game, so changing those rules is unfair to him… even though there’s general agreement that the initial rules were unfair.

In this sense, I can’t get behind the idea that the seller has been harmed, specifically that the government has harmed him. This person will have suffered loss. His expected revenue stream has been blown up and it was that expected revenue stream that dictated the price he was willing to pay for the monopoly (this is where the econ profs will start talking about present value and future value and most people’s eyes glaze over). So, yes, he has suffered loss, just as any investor whose investment goes south suffers loss.

But this is a far way from an innocent being harmed.

To keep with our sporting analogy, the secondary lemonade seller certainly was playing a game, but that game was not extracting monopoly rents for delicious refreshing lemonade. The game he was playing was a political game. In our scenario, the secondary seller knew that he was buying a government-enforced monopoly***. He knew that the money he was planning on earning would be gifted to him by politicians. He knew that this was a privilege that the politician giveth and the politican can taketh away. Don’t tell me he was innocent. He knew the game, and he knew he could lose.

Now, we can’t fully blame the secondary lemonade seller for jumping into the game. He didn’t set the rules and he didn’t create the initial market distortion. He was just responding to incentives. Further, after buying that specific privilege, it’s quite understandable that he’ll want to recoup the money he spent. He is suffering a financial loss.

So, yes, we can worry about the harm that he is suffering, but we shouldn’t consider him an innocent, and we shouldn’t let this cloud our judgement when it comes to repealing such a bogus monopoly****. As with Ottawa’s cabbie’s, the wrong that is being perpetrated on the consumer is far worse than the harm that the secondary seller is suffering. If we must think of anyone in this scenario as “innocent”, it is the consumer.

Ottawa needs to sort out its taxi industry, and it needs to get rid of the plate system. This will cause hardship and will cause the current plate holders to feel some pain. When we are fixing these sorts of markets, we should concern ourselves with the monopoly sellers, not because they are innocent victims (they’re not), but because, simply, we should try to help alleviate suffering.

As James notes, the economic benefits of opening up these markets should be greater than the specific loss suffered by the monopoly sellers. Consequently, we can compensate them to help with the adjustment. Further, we can implement a gradual transition to an open market. The monopoly seller will then have time to prepare for the change.

Finally, we must remember that we’ll never be talking about lemonade stands. We’ll be talking about industries like Ottawa’s cabs. If the market were to open up, starting a cab company wouldn’t be as easy as setting up a lemonade stand on your front lawn. There barriers to entry. There are regulations that have to be followed. There are investments that must be made and funding that must be arranged. As the established provider, the monopoly seller will still have an advantage in this newly open market.

So, no, we needn’t worry ourselves too much with the trials of poor old monopoly sellers, whether they’re schlepping sweetened lemon juice or giving us a lift across town.

*And yes, this is a shameless plug for my blog on Ottawa politics… though I’m aware most of our readers won’t really have the vested interest in the subject matter that I do.

**Okay, it’s not a monopoly like in Roger’s example, but it’s a closed market and I wanted to stick with Roger’s initial wording. Sue me.

***If our secondary seller did not know that he was buying a government-enforced monopoly, then he had no reason to assume that he would be able to extract monopoly profits from the lemonade industry, and thus he wouldn’t have used that information in determining what price he would pay for the lemonade business. Consequently, he would have suffered no loss in expected revenue.

****And Roger and James aren’t defending the perpetuation of the monopoly, it should be noted, but they are more sympathetic to the secondary seller than I.