Market Urbanism

Liberalizing cities | From the bottom up

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NYC Taxi Reform Doesn’t Go Far Enough

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This post originally appeared at Neighborhood Effects, a Mercatus Center blog where we write about the economics of state and local policy.

Via Flickr user Ian Caldwell

Next week, New York Governor Cuomo is likely to sign a bill that will marginally increase competition in the NYC cab market. The new rule will allow passengers to hail some livery cars in outer boroughs and add 2,000 additional medallions for yellow cabs with wheelchair access.

The auction of these medallions  is projected to raise $1 billion. This figure might seem outlandish, but last month two medallions sold at auction for over $1 million. That’s right, it costs $1 million for the right to drive a cab in NYC, not accounting for any of the costs associated with owning and operating the vehicle.

The price tag of these medallions that are sold to the highest bidder demonstrates that in a free market, many more drivers would enter the cab industry. Artificially constraining the supply hurts both consumers and those who are not able to drive a cab because they are unable to purchase a medallion.

Unsurprisingly, the Metropolitan Taxicab Board of Trade remains strongly opposed to this bill. The increase in the supply of medallions will lower the value of the medallions that cab drivers and larger medallion companies already own. Their lobbying efforts reflect their desire to profit through the political system.

While this increase in the number of medallions available for yellow cabs and allowing some livery cars to be hailed represents a small improvement for New Yorkers, the reform does not go nearly far enough. For real reform, Mayor Bloomberg should look to Indianapolis.

Before Stephen Goldsmith was elected as the city’s mayor in 1991, the number of cabs permitted in Indianapolis was limited to 392. Goldsmith created a Regulatory Study Council whose first project was to reform taxi regulations. The RSC recommended eliminating regulatory barriers to entry and allowing cab drivers and companies to determine their own prices. In a case study of regulatory reform in Indianapolis, Adrian Moore writes:

The main resistance came from existing taxi companies, and initially much of the city and county council sided with them in the name of the “public interest.” However, the support for reform by seniors, the inner city poor, minorities, the Urban League, and the disabled soon brought many of them over to the RSC’s side. The RSC expected little support from Democrats on the council, but the strong support for deregulation from that party’s traditional constituents turned the tide.

Some price controls remain in the Indianapolis taxi market, but the city has seen an increase in supply, a decrease in fares, and an improvement in service. Indianapolis and New York City are of course very different, but the laws of supply, demand, and rent-seeking are the same everywhere. By phasing out the medallion system, New York City would benefit consumers and allow many more people to make a living driving cabs. Medallion owners who have invested in some cases over $1 million in the current system would need to be compensated in some way, but not by continuing to profit at the public’s expense.

Comments

  2. You must be kidding…

    Taking a taxi in Indianapolis is like taking a taxi in a third world country.  Your more likely to be picked up in a 1986 Winstar Minivan missing a few arm rests, with a driver who just clearly finished off a cigarette minutes before you got in.  Credit cards? Ha. No way that is happening.

    Indianapolis is a dreadful city in which to find a cab. If your near the Conrad Hilton sure you can find one there but, outside the bars? Nope. Hail one? Never, ever, ever.

    Furthermore, the taxi industry in NYC is regulated both on price and supply so a lot of the conventional economic analysis fails.

    Also, medallion owners would need to be compensated? WHY? They took a risk on a asset just like any other.

  3. Emily, what do you think is the fairest way to compensate medallion owners? I’ve been thinking about how to bust up the liquor licensing regime for bars and restaurants in PA, and it’s the same issue. Licenses are capped at 1 per 3000 people per county. Bar owners spend can spend up to $200K for a license, and they obviously think it would be unfair to uncap them. Who’s supposed to pay though? Taxpayers? Are license owners/medallion owners entitled to get back what they paid?

  5. I’d wager that many developing-world cities have better access to cabs that Indianapolis. While I’ve been there a few times, I’ve never taken a cab there and wouldn’t want to try.

    Indianapolis doesn’t have a thriving taxi industry because it’s a sprawling, low-density city. The point is, though, that deregulation made the situation much better than it was. Like NYC, Indianapolis still has price controls in place. Getting rid of these would likely result in further improvements. If New York had comparable results, imagine how good taxi service would be in Manhattan.

    I think that medallion owners would need to be compensated for two reasons:
    1) The political reality of the situation;
    2) Taxi medallions are not an asset like any other. They are a very unique asset. They represent NYC’s commitment to the current policy, and taxi owners bought them having faith that the policy wouldn’t change suddenly.
    Unlike municipal bond holders, medallion investors don’t have access to information about the risk of this asset.

  6. I really don’t know what the right answer is to this. My colleague Matt Mitchell wrote a post about the NYC situation and went into some of the reasons it’s so hard to get out of a situation like this here:
    http://neighborhoodeffects.mercatus.org/2011/10/27/trapped-by-government-privilege/

    In both the NYC and PA situations, maybe gradually phasing out the medallions would better than compensating owners as I’d originally said. For example, both governments could say they will increase the number of medallions available by 50% for ten years at which point the medallions will no longer be used. This way, medallion owners would know what to expect and they could continue to earn above-market profits for the period when the medallions were being phased out to earn some money on their investment.

    If you’re interested in the PA privatization issue, you might be interested in this paper if you haven’t already seen it:
    http://www.antolin-davies.com/research/bingethinking.pdf

  9. Phasing the change in gradually doesn’t make that much difference; the price of medallions would still crash as soon as the reform was announced, since many owners view them as a long-term investment.  Most of the negative effects of medallion abolition/phaseout would be results of the increase in regulatory uncertainty in this and similar sectors of the NYC economy, and the uncertainty would not be much less just because the medallion owners did not lose quite as much.  Nor would their political resistance be much lower just because they were losing less.  Either way you have to confront the question of benefits of abolishing the system vs. cost of regulatory uncertainty in the economy.

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