Designing a Better Taxi Transport Mechanism

By TAN Kee Wee

(MediaCorp 938LIVE’s Money Talks, Thursday, 25 October 2007, 7.45 am and 7.20 pm)

Believe it or not, Singapore taxi drivers, who are working with touts, are actually trying to improve the efficiency of our taxi transport system.

First, let me show you how they work. The tout would approach the tourist at the taxi queue and ask whether he would like to pay more to jump queue. If the answer is “yes”, a taxi would appear immediately. Instead of going by the meter, a flat fee, two to three times the normal fare, is charged.

Many Singaporeans are unhappy with this illegal practice because it not only deprives them of their taxis, they also fear that this practice would spread.

This unhappiness may be misplaced. When there’s a shortage of, let’s say, private bankers, their salaries go up to attract more players. In the process, both parties benefit and the system is made more efficient.

The issue is: How to design a taxi transport system that will give higher incomes to taxi drivers and satisfy passengers willing to pay more, at certain times and places.

This is an area of economics which is addressed by Mechanism Design Theory. Last week, three economists were awarded the 2007 Nobel Prize in Economics for their contributions to this field of study.

So what is Mechanism Design Theory? It is basically the art and science of designing a mechanism to achieve a certain outcome. Although it is a highly abstract and mathematical theory, it can be applied to our taxi transport system.

Suppose you are a taxi driver. You see two potential passengers waiting for a taxi. There is Mr Fast, who is in a hurry to go to the airport and who values his taxi ride at $100. And then there is Mr Slow, who is going home and values his taxi ride at just $10.

If you knew this information, you would choose Mr Fast, charge him $100, and maximize your income. But since you don’t know this information, the solution is to try and reveal this information by conducting an auction.

In a normal auction, Mr Fast would be the successful bidder at $11 because Mr Slow would stop bidding above $10. But we know that you can earn more from Mr Fast. The trick is to add a new rule to the auction.

For instance, you could put in a reserve price, like a special booking fee, of say $20. In this case, Mr Fast would still be your passenger because it is still below his $100 value.

You need not stop here. You could add more rules. If the auction or mechanism is designed well, you, the taxi driver, will maximize your income. This is what Mechanism Design Theory is all about.

Today, this theory is used widely by economists to resolve many issues, for example, in the areas of health care, environmental protection, and the sub-prime crisis.

Let’s go back to our taxi transport system. Despite peak-hour and advance booking surcharges, touting persists because it is another way of finding out how much passengers are willing to pay. Since touting is illegal and quite labour-intensive, something else must be introduced to take its place.

In Hongkong, they have a neat solution. Whenever a passenger flags down a taxi, he would also raise two or three fingers. This shows his willingness to pay two or three times the taxi meter charge.

This fits in nicely with Mechanism Design Theory because more information is revealed. And the taxi transport system is made more efficient. Perhaps, we should adopt this practice. So next time, when you can’t get a taxi easily, just show two fingers to them.