IT IS AN interesting experiment that New Territories taxi drivers have embarked on to cut fares by 25 per cent in the hope that they will attract enough extra passengers to boost their revenues despite lower fares. The statistics on the taxi business are not sufficiently detailed for analysis of trade in the New Territories alone but urban cabbies also complain of declining patronage. How bad are things for them overall or, at least, how bad were they up to the end of March, the latest date for which figures are available? The first chart gives you an indication of relative pricing with figures taken from the sub-components of consumer price index (CPI). They are rebased to an index level of 100 for May, 1998, the month that prices on the overall CPI peaked. The red line represents this inflation index for taxis, up in annual steps until mid-1998 and then flat with no change ever since. This, however, still represents a considerable increase in relative pricing given that overall consumer prices, represented by the green line, fell by 14 per cent over the period. But now look at the blue line. It represents a passenger weighted average of fares for all other modes of public transport and it has actually risen slightly since mid-1998. In other words, a taxi ride is more expensive now than in mid-1998 relative to other things on which you could spend your money but not if that money is earmarked for public transport. Taxi fares are still in line in that case. And, as the second chart shows, up to the end of March at least, there was no significant decline in taxi patronage. The passenger figures have been static for about the past five years. Taxi journeys accounted for about 12.7 per cent of overall public transport journeys 10 years ago. That figure is now 11.7 per cent, down but not hugely so. Similarly, the number of passengers per taxi per day was slightly down by March but once again only fractionally. It seems that the plight taxi drivers now face is very much Sars related. The figures for April and May will undoubtedly show a steep decline when they are published. With the Sars scare now ebbing, however, you would expect a rapid recovery before summer is over. If so, that New Territories fare cut is likely to be of short duration. But there is another way of looking at the drivers' plight and the key to this was a sidebar story - headlined 'It's still a good business' - that we published on Friday beside a longer feature on the New Territories fare cut. This story quoted a taxi owner who said that out of the $18,000 per taxi he gets every month from renting his taxis out to drivers, he makes loan repayments of $15,000. He was quick to point out that the figure was not so large because the cost of the taxi itself was 'comparatively cheap'. It is large because the cost of buying a taxi licence is about $2 million. This is where most of your money goes when you hand over your fare to your driver at the end of a trip. And why does it cost so much? Pardon me for clambering on to this old warhorse again but I think it needs doing. When you fix the supply of any commodity or service in a market and also fix the price you are asking for trouble if that price does not exactly balance supply and demand. The number of taxi licences is fixed by the government and the fare is also fixed. In this case that fare has been set higher than the marketplace would have set it. We know that this is so because another market has sprung up to take the place of the one that has been suppressed and this market values a taxi licence at $2 million. The beneficiary is not the taxi driver, it is not the taxi owner who must service the debt he incurred to buy the licence, it is not even the bank that advanced him the money and it certainly is not you, the passenger. It is rather the lucky people who years ago paid little for these licences, then saw them rise in value to $2 million each and probably cashed out, having done no work for this windfall. Do the numbers: 18,000 taxi licences at $2 million each is $36 billion and we are all of us stuck with this burden every time we step into a taxi. That is what you get when you trammel with a market. I sympathise with taxi drivers but I do not know how we get out of this fix now.