Designing a Better Taxi Transport
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 25 October 2007,
7.45 am and 7.20 pm)
Believe it or not, Singapore taxi drivers, who are
working with touts, are actually trying to improve the
efficiency of our taxi transport system.
First, let me show you how they work. The tout would
approach the tourist at the taxi queue and ask whether he would
like to pay more to jump queue. If the answer is “yes”, a taxi
would appear immediately. Instead of going by the meter, a flat
fee, two to three times the normal fare, is charged.
Many Singaporeans are unhappy with this illegal practice
because it not only deprives them of their taxis, they also
fear that this practice would spread.
This unhappiness may be misplaced. When there’s a
shortage of, let’s say, private bankers, their salaries go up
to attract more players. In the process, both parties benefit
and the system is made more efficient.
The issue is: How to design a taxi transport system
that will give higher incomes to taxi drivers and satisfy
passengers willing to pay more, at certain times and
This is an area of economics which is addressed by
Mechanism Design Theory. Last week, three economists were
awarded the 2007 Nobel Prize in Economics for their
contributions to this field of study.
So what is Mechanism Design Theory? It is basically the art
and science of designing a mechanism to achieve a certain
outcome. Although it is a highly abstract and mathematical
theory, it can be applied to our taxi transport system.
Suppose you are a taxi driver. You see two potential
passengers waiting for a taxi. There is Mr Fast, who is in a
hurry to go to the airport and who values his taxi ride at
$100. And then there is Mr Slow, who is going home and values
his taxi ride at just $10.
If you knew this information, you would choose Mr
Fast, charge him $100, and maximize your income. But since you
don’t know this information, the solution is to try and reveal
this information by conducting an auction.
In a normal auction, Mr Fast would be the successful
bidder at $11 because Mr Slow would stop bidding above $10. But
we know that you can earn more from Mr Fast. The trick is to
add a new rule to the auction.
For instance, you could put in a reserve price, like a
special booking fee, of say $20. In this case, Mr Fast would
still be your passenger because it is still below his $100
You need not stop here. You could add more rules. If the
auction or mechanism is designed well, you, the taxi driver,
will maximize your income. This is what Mechanism Design Theory
is all about.
Today, this theory is used widely by economists to
resolve many issues, for example, in the areas of health care,
environmental protection, and the sub-prime crisis.
Let’s go back to our taxi transport system. Despite
peak-hour and advance booking surcharges, touting persists
because it is another way of finding out how much passengers
are willing to pay. Since touting is illegal and quite
labour-intensive, something else must be introduced to take its
In Hongkong, they have a neat solution. Whenever a
passenger flags down a taxi, he would also raise two or three
fingers. This shows his willingness to pay two or three times
the taxi meter charge.
This fits in nicely with Mechanism Design Theory
because more information is revealed. And the taxi transport
system is made more efficient. Perhaps, we should adopt this
practice. So next time, when you can’t get a taxi easily, just
show two fingers to them.