How many autos is too many autos?

Anyone who has had to negotiate an auto-rickshaw fare in places like Chennai or Delhi knows that it is an experience that is highly unsatisfying, to say the least. Since there is no metering system in place, it is purely left to your negotiation skills, where the odds are stacked against you. You only have a vague idea of the distance and even little idea of what a reasonable fare per kilometer ought to be. In a perfect market, you can have multiple auto drivers bidding to meet your demand in a reverse auction mechanism which would settle the fare at the marginal cost. However, anyone who has tried that strategy with a clique of auto-drivers on a street corner in Chennai will testify that nothing could be farther from the truth - there is a well established cartel which controls the price bands. The only possible upside of these transactions is that once you have a rate agreed upon, it is the auto driver has every incentive to put you to your destination in the shortest distance and time possible.

Cities like Bangalore and Bombay, on the other hand, have a metering system in place. While it is vastly superior as a pricing mechanism, it can lead to other distortionary actions as well. For instance, once an auto driver has a passenger, there is clearly an incentive to maximize the distance covered in travelling from point A to point B since the alternative for the driver would be waiting for a passenger without any marginal revenues. These is even more so when there is an excess supply of autos which would create an incentive for the driver to 'hold on' to a passenger as long as possible. There are two ways to counter this: the first one is to offer a minimum guaranteed fare for the auto driver. In Bangalore, this is fixed at 2 km i.e. you have to dish out 2km worth of fare even if you need to travel less than this distance. This could act as an incentive for the driver to keep 'rotating' passengers, under the assumption that there is a possibility of landing up with short-distance rides. In other words, one way to create a dis-incentive for the drivers to take their passengers for a ride (literally!) could be to increase the guaranteed base fare.

However, there is a trickier problem at hand - if there is a supply glut (i.e. too many autos chasing too few passengers), it is likely to encourage the drivers to hold on to a passenger as long as possible, since in the absence of a point-to-point fare negotiation option, the only alternative to maximize revenue is to milk distance from each captive passenger. The opposite situation of too few autos is clearly undesirable. And that begs the question - how do we know the optimal number of autos required to serve a city? The simplistic answer would be to let the market decide but that is clearly not so straightforward in a market where the entry and exit costs are non-zero. In fact, the entry costs are quite high - the cost of procuring an auto, a driving license and then a license to operate the auto. The exit costs, meanwhile, could end up being quite high when the auto is bought on a loan (which is usually the case) and any exit from the market could end up being an expensive proposition, which often ends up forcing them to continue in the market even though it may not be economically viable.

One potential way to get around this supply-demand imbalance could be to make the auto-licenses transferable in an open auction market (like a secondary market for equities). This would essentially give each auto-license owner the right to auction it in this market, subject to a floor price (which would be equal to the cost of a fresh license). The premium at which the licenses would trade could then be a good indicator of the supply-demand gap. Thus, when the premium starts increasing, the government could issue fresh licenses, bringing the premium down. This has the clear advantage of the market determining the supply-demand equilibrium for autos in any city and would be a clear leg up over the current system of a government issuing licenses without any particular method of arriving at the optimal number.

And so, the question is not to ask 'how many autos should Bangalore have' but to create a mechanism by which the market will determine the right number. Would that mean that this proposed system could create an economic haven where you can always get the auto who would take you to your destination in the shortest possible route? Now that is like expecting economic theory to predict human behavior!!