IntroductionTaxi licenses in Australia are expensive and not tenable to many while the driver’s wages are low. The taxi industry in Australia is an example of how the assets given by the government create economic rent at the expense of the common taxi driver. It is approximated that there are 5181 taxi licenses in Victoria City. The Department of Transport in Victoria leases approximately 1100 licenses to operators annually translating to eleven million dollars or about ten thousand dollars per license per annum. Australians remaining taxi licenses are owned by private companies that pay an annual fee of about five thousand dollars for the right.1 The licenses are valuable and extremely exorbitant. The Directorate of taxi drivers advertised on their website that the previous year’s average sale of a license in Melbourne was $484,200. In Australia, the taxi license is far much expensive than owning a rental house.1 The value of the license is supported by the scarcity of the commodity as the state resists the supply of the license not to exceed the demand by the customers.1 The license fee is the capitalized differences in the fees collected on fares and the cost of running a taxi, that is, fuel cost, wages, insurance, vehicle, the government charges, and the network service provider. Thus, the approximately four thousand privately owned licenses are therefore worth some 1.93 billion dollars. It is noted that for a taxi license to be available in the open market for about half a million, the taxi must be generating substantial profits in the market. For the industry to reach that level of generating profits, it takes some level of skills and staff management and proper vehicle management. The situation, however, is a return to labor and not to the taxi. The economic rent, that is, the annual value of the license can be identified from the leasing cost. Approximately 70% of licenses cost in Sydney are leased to the taxi drivers for about $30,000 annually, a price to the earnings ratio of 16. The Australian government monopoly they grant generates substantial windfall profits for private interest. Sadly, the country’s economy is riddled with many economic rents like the taxi licenses.
The high cost of taxi licenses in Australia can be explained by the economic concept that looks on the demand and supply together with other factors. According to the economic concept, there are five factors that consumers need to know and understand in the business environment.
Scarcity is the primary concept in the field of economics, and it is more of a solid factor that most of the abstraction. A license is often a scarce commodity not only in Australia but the world at large. The government withholds giving out of the taxi licenses unless the taxi proves that it is stable and making abnormal profits and is stable enough. When the licenses are made to be cheap, there would be a high demand for the commodity making the licenses have no value. Thus, by making the licenses expensive, the attribute of scarcity is deemed possible that fits the law of economics.
Supply and demand
Every market system is driven by demand and supply. The taxi industry is just but a good example of a developing market system.2 In Australia, for instance, there is an increase in the number of taxi operators meaning the demand for the license is high. When the demand is high, it means the state can charge more for the license and make more money when the market is still fresh. As the demand rises, the supply of the licenses shrinks, so the taxi drivers look for the licenses quickly. The situation is typical of a normal demand and supply curve of any commodity as illustrated below.
Cost and benefits
The taxi industry in Australia applies the concept of cost and benefits that entails a broad area of economics that is to do with some rational expectations and choices. In the issuance of taxi licenses in Australia, the individuals are likely to make the choices that benefit them with the least cost. In the other way, the choice of the taxi license provides more benefit than the cost of getting the license. The drives must get the licenses though they seem expensive since the benefits accrued at the end surpass the cost of the licenses.
Everything is in the incentives
In any business, incentives are part of the benefits and costs and the rational expectations. The elements are imperative that they are worth more examinations. The incentives make the taxi industry move and sometimes go wrong. In the taxi industry, the chances are that the incentives are good and in alignment with what the taxi drivers want to achieve.
Putting it all together
Scarcity is the imperative element of economics though it sounds negative. With scarcity, the government controls the availability of the licenses. The choices are often decided by the cost although when the benefits are of sound value, the consumers opt to go for the licenses without minding the cost. The elements feed into others, for example, comparative advantage, the marginal benefits, and the comparative advantage.
The country’s forecast tax system has a smorgasbord of the country-based regressive and expensive to collect the tax. There are various opportunities to reduce taxes on swinging voters in the country.The solution to the high value of licenses can be very simple. For instance, a rise in the annual registration fee for the licenses like to about $24,000 annually, returning some $117 million to the Treasury to cut tax and fund it elsewhere can be a lasting solution to the problem.
- Mulley, Corinne, et al. “Barriers to implementing flexible transport services: An international comparison of the experiences in Australia, Europe and USA.” Research in Transportation Business & Management 3 (2012): 3-11.
- Gerschlager, Caroline, ed. Expanding the economic concept of exchange: deception, self-deception and illusions. Springer Science & Business Media, 2012, New York, NY.
- Phlips, Louis. Applied Consumption Analysis: Volume 5 in Advanced Textbooks in Economics. Vol. 5. Elsevier, 2014, New York, NY.
- Shapiro, Carl, and Hal R. Varian. Information rules: a strategic guide to the network economy. Harvard Business Press, 2013, New York, NY.