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THE COSTS OF THE CAB

Critics often castigate government regulators for distorting market relationships and raising costs to consumers of the products or services of the regulated industry. Seldom, however, are such criticisms made quantitative, making it difficult to estimate the true cost of such intervention. Now, however. Prof. Theodore Keeler of the University of California (Berkeley) has published the results of his analysis of the costs to consumers of CAB regulation of interstate airlines.

Prior to Keeler's work the most complete analysis of this problem was that of William Jordan of UCLA, whose comparison of California (unregulated) intrastate routes with interstate Northeast Corridor routes led him to conclude that 1965 interstate fares would have been between 32 and 47% lower in the absence of CAB regulation. Jordan's comparison was based on a rather limited set of cases, however. In order to generalize the analysis, Keeler developed a detailed cost model for interstate air fares and used it to predict hypothetical unregulated cost-based fares for 30 major domestic markets. To test out the model, Keeler used it to predict fares on the unregulated California routes, which it did quite accurately.

The results were striking. Using 1968 data, the model showed that regulated airfares had markups over the estimated unregulated fares ranging from 20 to 95%, depending on distance. For 1972 data, the markups ranged from 48 to 84%. Keeler assesses these results and concludes that the customary arguments for regulation of air fares are a farce. As both Jordan and George Stigler before him have argued, Keeler affirms that "Airline regulation is basically a government-enforced cartel existing for the benefit of the regulated firms…Given that airline regulation on high-density routes extracts high social costs and confers very few benefits on anyone, the case against it is strong indeed."

SOURCES:
AIRLINE REGULATION IN AMERICA, William A. Jordan, Baltimore: John Hopkins University Press, 1970.
• "Airline Regulation and Market Performance," Theodore E. Keeler, THE BELL JOURNAL OF ECONOMICS AND MANAGEMENT SCIENCE, Vol. 3, No. 2, Autumn 1972, p. 399. (Note: THE BELL JOURNAL is available without charge to those interested in economic analysis of regulated industries. Contact P.E. Davis, THE BELL JOURNAL, American Telephone and Telegraph Co., 195 Broadway, New York, NY 10007.)

DEFLATING THE AIR BAG HYPE

The federal government's plan to force air bags on auto makers and buyers has come under increasing attacks of late. Basically, the Department of Transportation plan would not only require air bags as crash-protection devices, but also do away with seat and shoulder belts. As Brock Yates pointed out in these pages some two years ago (REASON, March 1971), air bags, unlike belts, protect only in front-end collisions, and more seriously, can go off accidentally, causing accidents that otherwise would not have occurred. Lap and shoulder belts have proved very effective in preventing serious injuries; the only problem is that their use is voluntary—and many people choose not to use them.

These points have been raised forcefully in recent attacks on DOT's plans. The LOS ANGELES TIMES has editorialized that "the whole thing is too chancy to risk," and has called the plan "nonsensical." The American Automobile Association in November called on DOT to rescind its plan, pointing out that in public demonstrations to date air bags have an "almost 100 percent failure rate."

AAA criticized DOT and Ralph Nader for trying to sell the public a bill of goods, and for ignoring the documented effectiveness of the 3-point lap and shoulder harness. While DOT has spent some $10 million on air bag development, it has spent almost nothing on improved belts and harnesses, owing to the agency's hostility to voluntary safety devices.

The most recent development was a 2-1 ruling by the Sixth Circuit Court of Appeals on December 5 that DOT's plan to require installation of air bags in 1976 model cars must be delayed until new ways of testing the devices are developed. The court held that auto manufacturers could not be required "to develop an effective restraint device in the absence of an effective testing device which will assure uniform, repeatable, and consistent test results."

SOURCES:
• "Nonsensical Approach to Auto Safety," Editorial. LOS ANGELES TIMES, 24 November 1972.
• "AAA Asks Suspension of Rule Requiring Air Bags in Autos," AP (Washington), 19 November 1972.
• "Air Bags in Autos May Be Delayed," LOS ANGELES TIMES, 6 December 1972.

LA TAXI MONOPOLY ERODING

For many years the people of Los Angeles have been plagued by a government-granted monopoly on taxicab service. The central city, the major business districts, and Los Angeles International Airport are all served only by Yellow Cab Company. Finally, in July 1971, the city government modified the terms of the franchise to permit limited competition in the lower-traffic areas of West Los Angeles, West Hollywood, and the San Fernando Valley. After a year of competitive service in these areas, the city's Department of Public Utilities and Transportation (PU&T) conducted a study of its effects.

The study clearly demonstrated the benefits of competition. Taxi service in the three test areas has markedly improved, with a significant share of the business going to the four other companies involved. At the same time, Yellow Cab's service has continued its three-year decline. In particular, Yellow Cab showed a sharp increase in "no shows" and "lost orders" compared with previous years. This evidence was enough to convince the LOS ANGELES TIMES, which recommended on 3 October that Yellow Cab's monopoly be ended throughout the city.

Despite the evidence of its own study, PU&T opted for the more traditional regulatory agency response. After a promise by Yellow Cab to improve its service by adding 100 more cabs, PU&T unanimously recommended that the City Council continue the monopoly for at least the next year. "Then if the company fails to comply," they said, "it is recommended that a competitive taxicab franchise be granted."

SOURCES:
• "Yellow Cab's Phone Answering, Response Times Hit in Report," Erwin Baker LOS ANGELES TIMES. 2 October 1972.
• "Taxi Monopoly Hurts the Rider," LOS ANGELES TIMES editorial, 3 October 1972.
• "Continued Taxicab Monopoly Urged," Erwin Baker. LOS ANGELES TIMES, 6 October 1972.

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