The taxi problem in Western Australia is no secret. If you have ever been out after 6pm, you will have encountered the all too common scenario of calling the State's taxi company (the monopoly known as Swan Taxis), requesting a taxi, being informed that there should be one there within 15 minutes only for nothing to show up. Follow-up calls are usually made in vein; the company informs you that the taxi who picked up your request simply decided he had a better offer elsewhere, says you were not there and then your booking is effectively lost (it never goes back to the call centre to be picked up again). Then there is the problem in the so-called social hubs of Fremantle and Northbridge where you wait at a designated taxi stand for hours on end wondering where on earth all the taxis have gone.

But not for any longer! Believe it or not, our wise and benevolent politicians have noticed this too. They claim it is simply a problem of incentives: the taxi drivers just do not want to go to these places because the patrons are drunk or, in the case of a phone call, there is a chance that the patron will have found a better option by the time they get there. So the latest idea to "solve" Perth's taxi problem is to offer drivers an extra $10 on top of their regular fare to pick up passengers from Fremantle nightspots on weekends, paid for with a new $80,000 tax on nightclubs.

While yet another subsidy for taxi drivers may well help alleviate the problem, the real question we should be asking is why is the taxi market not clearing in the first place? Is this really a market failure -- as this response would indicate -- or is it government failure?

We are inclined to believe the latter. The politicians who are proposing this solution are the same ones who flat out refuse to remove the artificial limits they have placed on the supply of taxi plates. It is the combination of both a fixed supply - according to the Department of Transport, the 2007 average market price to buy an existing full-time taxi plate was $217,871 - and a rigid price (it is heavily regulated) which results not only in taxis being unable to raise prices thereby attracting new entrants into the industry to service the less desirable locations and drive prices down (no pun intended) but also a shortage as the taxi drivers, being unable to use the price system to meet demand, simply pick and choose the best fares.

A real solution would be to deregulate the market for license plates. This is of course easier said than done: Gordon Tullock long ago pointed out that once an industry becomes regulated there is a "transitional gains trap", where one outcome is that people who may have initially opposed the regulation support it once it is enacted so as to preserve their sunk costs. The people who gained the most from the regulation are those who got the first license plates and "capitalised" (extracted) the initial gains from society. These people have most likely left the industry already. Thus, we are left with an interest group who has paid the current market price to enter the regulated industry - the current plate holders - and have to be paid off to give up this power, an amount usually equal to the present value of their future income stream derived from their position of power. Unfortunately simply abolishing the licenses altogether would result in large losses for the current entrenched interests, something that is almost always politically and socially unacceptable.