Recent changes in policy towards taxi regulation and indications of possible future changes represent an inadequate response to the dramatic gap between supply and demand in this important transport service.

Increasing the supply of taxis for Dublin by around 200 per annum is not satisfactory given that the shortage in the supply of taxis relative to demand is estimated to be around 2,000 taxis. It is now time to implement a more rational economic policy towards taxis in the Republic.

Current policy which restricts entry to the taxi business has had predictable economic effects. Specifically restricting the number of licences for taxis means that existing licence holders benefit from economic rents, (as reflected in the price of taxi plates), the supply of taxis, particularly at peak periods, is below the level of market demand, and taxi drivers have to accept lower incomes or charge higher prices to fund the cost of taxi plates, which have been estimated to be around £80,000.

As a result, resident commuters and tourists are disadvantaged, employment in the taxi business is less than justified by market demand, more people use private cars rather than taxis and congestion costs are higher. Current policy may also have had a negative impact on tourism and on the attractiveness of Dublin as a location for service and other businesses.

All of these negative economic and social impacts are a result of inappropriate policies which fail to accept the importance of relying on market mechanisms unless there are specific reasons for not doing so. These implications were highlighted in a publication written by me as far back as 1992 when I pointed out that "in the case of taxi licences . . . there is no greater case for Government restrictions on entry than there is for Government restrictions on the number of grocer shops or other service activities". A similar point applies to restrictions on new entrants to a number of other service areas including pubs.

If the economic case for removing the restrictions on the number of new licences is so strong it is reasonable to ask why has policy not been changed? The answer is because correcting the error of previous policy would result in a dramatic financial loss to existing holders of taxi licences. It is thought that some of these licence holders may have used redundancy payments or taken out bank borrowings to purchase taxi plates. It is therefore not at all surprising that holders of taxi licences should protest against any perceived policy which has the effect of dramatically reducing or wiping out the value of their assets. Taxi drivers are in this sense acting rationally even if policymakers have failed to do so. The fact that such policies may be for the public good and even improve demand in their business is of little comfort.

A purist economic analyst might suggest that the only response required is to immediately remove all restrictions on entry to the taxi business. Those concerned with solving the political difficulties inherent in the taxi drivers' protests might attempt to abandon or slow down plans to increase the number of new licences. Both responses would be inappropriate.

What is urgently required is a combination of policies which will, as soon as possible, abolish all restrictions on entry to the taxi business and also find a mechanism to respond to the resultant loss in value of the assets of existing licence holders.

In order to address these two requirements and to achieve other economic and transport objectives the following steps should be taken: [SBX]

Abolish all restrictions on the issue of taxi licences within a three-year period.

The resultant loss in the value of the assets of existing licence holders should be addressed by devising an appropriate form of compensation. This could involve a system of charging significant sums for new licences on a declining scale over three years with the resultant funds being used to compensate existing licence holders. An alternative and probably better approach would be to issue approximately 700 additional licences per annum to existing holders over the next three years prior to the total liberalisation of the sector - existing licence holders would be free to use or to sell such licences.

Set the taxi licence fee renewal charges at a level to only cover the administration costs involved and not to be used as a revenue generation source for local authorities.

A fundamental review of the price-control system on fares should be undertaken to involve an examination of the necessity for such restrictions and the merits of differential prices for peak and off-peak periods.

Introduce an increased number of quality bus and taxi corridors and implement more effective road pricing policies for private car users.

The above policies would have the impact of increasing the availability and usage of taxis. They would expand employment in the taxi sector and reduce the economic costs of congestion in Dublin. They would also contribute to making Dublin an even more attractive city for tourists and residents. These economic benefits could be achieved at no cost to the Exchequer.

Also of importance is that acceptance of such a package of initiatives would also be in the interests of taxi drivers and existing licence holders. The alternative for taxi drivers is a period of on-going disputes where the value of their licences are eroded over time without compensation and with increasing alienation of their customers. It is hoped that economic logic will prevail in this area.

Alan W. Gray is managing director of Indecon Economic Consultants. His recent publications include International Perspectives on the Irish Economy.