It’s not hard to understand the problem of the taxi industry. It’s a classic monopoly situation: the supply of licences is tightly restricted, so they command astronomical prices, so the owners of licences have to charge exorbitant fares in order to recover their costs. The money isn’t going to the drivers, who usually get by on a pittance; it’s being wasted as rent to those who were lucky enough to get licences before their price rose.

That’s why, just about anywhere you go in the western world (Sweden and New Zealand are among the rare exceptions), taxis are an almighty rip-off. But the popular pressure for reform is less than it might be because most taxi trips are being paid with someone else’s money. For the majority of the population, taking a taxi is a rare event, but businesspeople and politicians do it all the time.

That’s another reason reform is so hard: taxi drivers are in a powerful position to influence public opinion, because opinion-leaders spend a disproportionate amount of their time in taxis. Add to that the fact that wealthy taxi magnates seem to have such a close relationship with politicians — as revealed on last night’s 7.30 — and you start to get an idea why the racket has continued for so long.

Every now and then, someone has a go at it. In 2008, then-president Nicolas Sarkozy welcomed a report that proposed reform of France’s sclerotic taxi industry. (According to The New York Times, Paris at that point had only 1900 more taxis than it had in 1937.) But a strike and blockades by taxi drivers quickly forced a backdown.

Now it’s Victoria’s turn. Allan Fels, the former head of the ACCC, has produced a major report, released yesterday, stating that “comprehensive regulatory reform of the taxi and hire car industry is long overdue”. The state government has welcomed the report and promised six weeks of public comment before final recommendations are made.

Most of Fels’ suggestions seem sensible, although some are basically cosmetic. But the crux of the report is what he says about the problem of competition versus monopoly. Fels is clearly on the side of deregulation: as he says up front in the report’s overview (page 21):

“The inquiry considers that there are no strong public interest grounds for continuing to restrict entry to the taxi market. These restrictions are clearly detrimental to competition and innovation, as well as making it very difficult for a wider range of people, including drivers, to operate their own taxi businesses. In addition, as the inquiry has found, the holders of these restricted licences are able to capture a substantial share of industry income without re-investing their rewards back into the industry. The industry’s performance suffers as a result.”

But he realises that complete open-entry — where new taxi licences would be available to anyone on payment of a small administrative charge — is politically impossible. Instead, he cleverly proposes a compromise.

Licence prices would be fixed: Fels suggests $20,000 per year in greater Melbourne, less in regional areas. But crucially, their number would not be limited; “any qualified person can purchase a new licence from the government at any time” (24). And since he proposes that the licence fee should not be indexed, the constraint on supply would decrease over time.

That’s the part that current operators will fight tooth and nail to stop. A spokesperson for the Victorian Taxi Association said, apparently with a straight face, “we think there’s strong competition already in the industry”, and complained that “the new discounted licences will devalue existing licences”. One hears across the centuries faint echoes of the indignant plantation owner: “I paid good money for those slaves!”

It’s important to understand that the licence system isn’t a matter of restricting access to a particular occupation in the way we often do (with or without justification) in the name of quality control.

Governments don’t let just anyone practice medicine, for example, figuring that unqualified doctors could do a lot of harm. But there’s no restriction on becoming a taxi driver; the restriction is on the licence to operate a taxi. It’s as if we let anyone become a doctor, but restricted the number of doctors’ premises that could operate.

If the Baillieu government can make a serious dent in this madness it will make its name as a reforming government. More importantly, it will set an example for other states and other countries that badly need it.