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No Market Failure, No New Regulations

The U.S. Senate is about to consider federally regulating transportation network companies (TNCs) for the first time. But proof of market failure should always be a prerequisite for imposing new regulations. Meaning, only when “the individual incentives for rational behavior do not lead to rational outcomes for the group” does it make sense to impose the costs and risks of regulations. This bar is not met for the regulations proposed by Sami’s Law, now under consideration to be “hot lined” in the U.S. Senate. Born out of a tragedy and good intentions, the law seeks to make mandatory what’s already happening in the marketplace. Worse, the bill’s regulations would have harmful unintended consequences for consumers and workers in the transportation network economy. 

Specifically, the House version of the legislation, which passed with little debate in July, prescribes certain signage requirements for drivers and restrictions on selling. It also creates a new regulatory body at the Department of Transportation. It mandates a digital verification system between rider and driver as the default.

Uber, the largest ride share company in the U.S., already offers a digital verification system. Riders can opt-in for the extra safeguard today. But the service is opt-in, not opt-out, because, while it might be useful in some situations, like a woman traveling alone late at night, it might prove unnecessary and cumbersome in other scenarios, such as that same woman rushing to get in her Uber with her husband, small children, and a stroller in a rainstorm. When time is of the essence, the picture of the driver, license plate number, color, make, and model of the car might more than suffice. If this option proves popular with consumers, it is likely that Uber competitors will offer their own version of the service.

The market is already offering the extra verification option to consumers. That’s because Uber, Lyft and other ride share companies have every incentive to keep their riders and drivers safe. If they cannot, both parties will find another mode of employment or transportation that does. Increased safety is part of what makes consumers choose TNCs; in many ways, riders are much safer with the accountability of a platform than they would be in a traditional cab.

The market is working, not failing.

Not only is there no market failure justifying new regulations, but there’s harm in instituting those regulations. Leaders in the industry will be able to comply with the regulations (with the costs of doing so likely passed on to consumers), but those regulatory expenses will act as a barrier to entry to the next, yet-to-be-founded Uber or Lyft. That deterrent restricts the innovation and progress consumers of TNCs have been enjoying in the absence of heavy-handed federal regulation.

What happened to the law’s namesake was a tragedy and the desire to protect others from the same fate is laudable, but this bill is bad policy. The very least the Senate should do is to put the legislation through regular order. Opening up a whole segment of the economy to federal regulation for the first time warrants committee attention and debate. Ideally, Senators who value limited government and the innovation of the marketplace should reject making the legislation into law.