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Saturday, January 21, 2006

Free Markets Make You Safer

In an earlier post I wrote about how taxi companies and insurance companies, working together in a free market could ensure passenger safety more effectively and fairly, than an any state regulatory agency.

I suggested that in a true free market, taxi companies could be sued and therefore would need to carry public liability insurance. Therefore, the taxi companies and insurance companies would have a vested interest in vetting drivers effectively. They could also be more flexible than the "one size fits all" Land Transport Safety Authority.

Rich took issue with me. "So a downmarket taxi company finds it can't hire staff with clean records. They don't declare the dodgier drivers to the insurance company. One of their drivers rapes a passenger - the insurance company finds out he's got a record and refuses to pay out. The passenger tries to sue, but is rapidly advised that the company's got no assets...."

Rich fails to see how a true free market will work in practice.

In a free market, competition constantly lifts standards. When governments set "minimum standards" in an industry, they quickly become maximum standards. If the taxi, or any other industry involving public safety, is operating in a true free market, they will compete not just on price, but also on level of insurance cover and safety records.

Cab company A has a sign on it's car doors "we carry public liability insurance of $5 million dollars", Cab company B only carries $1 million dollars. Company A clearly has a better record and can afford higher insurance. Which company will attract more customers?

Dodgy companies will be liable, as will their directors, if a passenger is harmed, in an accident, or assaulted by a criminal driver. Who would risk, thousands, or millions, setting up a company that no one will insure, because their safety standards are too low?

A true free market drives dodgy companies out of business very quickly. Well run businesses expand more quickly, because of lower taxes, lower compliance costs etc, so the whole industry standard is lifted. The penalties for poor performance are prohibitive, the rewards for excellence are unlimited.

If you want safer taxis, cleaner restaurants, fewer air crashes and industrial accidents, the answer is simple. Ditch all the relevant state "safety" authorities and let industry and insurance companies work together to improve standards out of all recognition.


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