Economic theory tells us that barriers to entry in a particular sector tend to push prices up. In addition to increased costs, these restrictions also reduce the quality of the goods or services provided by incumbent companies and slow down the emergence of disruptive innovations.

Spain’s Taxi Problem

Spain’s taxi industry has traditionally been heavily regulated by its government.

These barriers often result from restrictions on competition. The regulations themselves are imposed by governments through laws and regulations. This allows for the formation and consolidation of monopolies and oligopolies that end up harming consumers.

This is exactly what’s happening in Spain with taxis. The taxi industry has been traditionally regulated via government licenses. The artificially-limited supply of licenses has resulted in the creation of a well-established oligopoly of taxi companies that have controlled the market over the last few decades. Due to this supply shortage, the price of licenses in the secondary market (licenses are granted by public administrations for ridiculous fees) has skyrocketed over the last fifteen years.

The graph below compares the price of taxi licenses in Barcelona with the IBEX 35 (the official index of the Spanish Continuous Market) returns in the period 2001-2016. As shown, the price of taxi licenses has more than tripled (a 9 percent annual return) while the Spanish stock market has remained practically flat. In other words, the price of a license has moved from around 36,000 € in 2001 to 134,000 € in 2016.

In addition, the monopolistic position of taxis has led to overpricing in the sector. The CNMC (the Spanish authority responsible for preserving competition) estimates that entry barriers have increased prices  by 12 percent; a conservative estimate, according to the CNMC itself, since it does not take into account “unproductive inefficiencies and dynamics resulting from a non-competitive environment and the cost in terms of waiting time in comparison with a situation of freedom of entry and price.”