Rickshaw economics

I spent the last week in Sri Lanka, a good time to do some back-of-the-envelope urban/development economics, in a country mending itself after three decades of civil war. Sri Lankan growth has been quite impressive: while GDP per capita was about $100 higher than Indian GDP per capita in 1990, the country’s GDP per capita is now more than double the Indian one.

Walking in the streets of Colombo or along the roads of the inner countryside, it seems quite evident there are a few priorities that will enable Sri Lanka to leverage its growth further: improving urban planning, public and private transportation, and property rights.

I’ll start with the most typical mode of transportation there: the auto rickshaw.

Auto rickshaws make sense in cities with little or low-quality public transportation. They offer a low cost, flexible transportation method. On the downside, Sri Lankan rickshaws are using gasoline — not natural gas as Indian rickshaws do. It doesn’t take fancy measurement devices to feel dust and particles as a pedestrian. And what about turning Sri Lankan rickshaws into electric rickshaws? Such rickshaws could be inspired by the Renault Tweezy.

There are of course issues with such proposal:

(i) each rickshaw driver sets his price freely. This likely pushes rickshaw drivers to price close to their marginal cost, i.e. the cost of gasoline and the opportunity cost of time. Ride prices are bargained one-on-one with clients and are not recorded or observable. That’s bad for the rickshaw industry as a whole; and that’s not enough to save for future rickshaw upgrades and maintenance costs.*

(ii) the largest benefits of cleaner rickshaws accrue to people who are not the drivers themselves. Rickshaw drivers don’t have strong enough incentives to drive better and cleaner rickshaws.

(iii) there’s a tragedy of the commons in the sense that rickshaw drivers collectively may benefit from higher prices, better maintained rickshaws, and cleaner air, but they individually have very little incentive to invest.

All of those remarks point towards a rickshaw service with a minimum price, and frequent maintenance with a number schemes. That should be managed either by a few oligopolistic chartered companies such as an Uber or Lyft, or a municipal regulator.

* Rickshaw drivers also practice quite a bit of price discrimination, trying to assess where a customer is from and thus what is his willingness to pay for the ride. That can sometimes allow them to charge much more than their marginal cost of the ride. A regulated price wouldn’t allow them to price discriminate like this, but a regulated minimum price would. The problem is not that prices are too high, but that prices are too high. Seems like rickshaw drivers are hurting