Is that what's going on in Australia with Uber?
Recall that Tullock's transitional gains trap obtains whenever the excess profit from a regulatory rent gets capitalised into the price of the asset in regulatory fixed supply. In the taxicab case, that's the medallion that gives you the right to drive a cab in supply-regulated markets. Once that capitalisation happens, the owners of the asset will have enjoyed a capital gain, but future buyers only should earn normal rates of return on investment. And there's the trap: the rule no longer conveys excess profits to anybody, but any changes will be fought because they'd impose capital losses.
Tullock thought that Pareto solutions were impossible in that kind of case, but I proposed something close to one anyway. Buy out existing licence holders at the value of their permits and abolish the permit regime (obviously use a price from before wind of the announcement got out). Issue bonds to cover the buy-out cost. Implement a tax on taxicab usage that pays off the bonds, and retire the tax when the bonds are paid off.
Advantage: the winners compensate the losers, and we get to move to the more efficient state of the world. It is not a Pareto move, because plenty of owners would prefer not to have had their permits taken at yesterday's price, but it's not far.
Now what does all of that miss? Technological change always affects equilibrium regulatory outcomes. That's the standard Peltzman work on regulation. We haven't had disruptive technological change in Canadian dairy as yet (another great transitional gains trap), but we have in taxicabs.
Uber makes maintaining the taxicab cartel more expensive. Cartel enforcement requires political will, and Uber makes the costs of the cartel more obvious to voters. And Uber also enables cartel driver defection: they can drive Uber on the side. Equilibrium stringency then should fall.
And we've seen that in New York. Medallion prices are way down. I used to lecture on this stuff, and noted the successes of Medallion Financial, a specialised lender that provided capital for folks to buy taxicab medallions. Their website once bragged* about how medallions provided above market returns for decades and were highly secure. Here's their stock ticker:
Meanwhile, the price of medallions has dropped from about a million dollars in 2014 down to $250,000 again.
So what does this have to do with paying off the losers? The main point of paying off the losers to get out of a transitional gains trap is to enable the switch to the more efficient outcome. If you're going to get to the more efficient outcome regardless, then paying the medallion owners is just a transfer that might have potential equity justification.
And so we come to Australia, where they're looking to tax Uber riders to compensate owners of cab licences.
If the change were going to happen anyway, should the existing cab owners be paid? I hadn't before caught this excellent piece by Richard Holden.
He works out which licence holders already earned back the price of their licences on a normal rate of return and argues there's no need to compensate those who've already earned back the value of their licenses. Most require no bailout on those grounds alone. Excess returns on these things are due to their inherent political risk anyway. Licence-holders in New South Wales who bought prior to 2012 had already earned back their investment, as had those in Victoria who bought before 2006.
For those who haven't yet earned a fair return on their investment, because they bought their licenses too recently, there could be hardship grounds for providing assistance, but he argues that it's little different than other cases where risky investments have not paid out. Do we bail out everyone who invested in IPOs of companies that fizzle? People who bought late bought knowing that the tech was changing. And if the case for payment is on hardship grounds, it should be means-tested and funded out of general government revenues rather than by cab riders.
Holdin also points out pernicious incentive effects if innovators have to pay off affected industries all the time. I've seen compensation as a last resort way out of horrible political equilbria, like Canadian dairy - not as something that should be the default.
* This was on their website circa 2000. I saved it and used it in my lecture notes on rent-seeking and transitional gains traps.
My grandfather got to this country from Europe, via Argentina, in 1923. He had $150 in his pocket, and soon after he got here, New York City issued 11,787 taxi medallions - the same number as there were until just a few years ago. Back then, they cost $10 apiece. My grandfather bought one, and he started driving a cab. In his mind, it was one of the few jobs in which success depended only on how hard you worked.
Soon, he had saved up enough to buy his second medallion, and by the 1960's, he had 150. They were terrific investments - better than stocks. We recently figured out that since the 1930's, the Dow Jones industrial average has gone up 11 percent a year on average, and taxi medallions 17 percent. Today, they sell for $250,000 each. In the 1970's, my father started selling off some of the medallions to diversify. But no bank would lend money to the buyers - immigrants from the Soviet Union, Haiti and India - because they didn't have any bank statements. So he started a loan business. We've lent over $1 billion and never had to possess a single loan even though the interest rates are higher than on bank loans.