The Regulations in NYC’s Taxi Market

In 1937, New York City introduced the taxi medallion. Taxi industries in cities have long been closely regulated, as people fear that without official standards, taxi drivers would either face unreasonable job insecurity, or taxi companies would be able to act as price discriminating monopolists, thereby reducing consumer welfare derived from taxis to zero.

The taxi medallion is a licence to operate in New York for a particular driver. In the aftermath of the Great Depression, the number of New York taxi drivers increased to 30,000 and as a result, both the cost per ride and quality were extraordinarily low. This was considered a market failure and about 13,000 medallions were issued in 1937.

The premise behind the medallion system was to increase driver profits and fix resource misallocation. It was hoped that a barrier to entry would achieve both. A barrier to entry reduces the competition in the market and allows the taxi drivers to make an adequate living by allowing them to charge more. In other words, the equilibrium point was now fixed at a point that allocated more profit to taxi drivers, while reducing consumer welfare. Restricting entry would also fix at least one side of the misallocation of resources. Drivers in market segments that were overserved would be forced out due to a lack of profits. It is also suggested that a market with free entry would not reach the optimal equilibrium because one firm adding a cab decreases the “dollar cost” of waiting time. This externality cannot be captured by only one firm; hence firms will operate at a less efficient level. Finally, medallions’ continued existence has also been justified as a way of internalizing the externalities of emissions and congestion caused by taxi cabs, although it was unlikely to be a reason for their introduction.

While the economics behind this decision were perhaps sound, a 1984 analysis by the Federal Trade Commission found “no persuasive economic rationale is available for some of the most important regulations”. This holds true; the very existence of a monetary value on a taxi medallion implies that prices are above the efficient equilibrium. The reason for this inefficiency is that current taxi firms have first pick on new medallions and can easily renew their existing ones. This prevents new firms from entering the market and competing on price with current taxi firms and allowing incumbents to charge far higher prices.

In New York, the main loser from this regulation, despite the theory, has been the drivers. This has arisen because the ownership of medallions has not remained with the drivers. There is large competition for the medallions and therefore the price has been driven towards the profit that could be made over one’s lifetime while in possession of a medallion. It currently sits at $200,000, but it peaked at $1.2 million in 2014 before the advent of Uber. Historically, a medallion has been a worthwhile investment because its value has always risen. Furthermore, drivers can earn far more serving areas that require a medallion. However, owners were taking out huge loans to buy medallions that they could not afford unless the price of a medallion went up. When the price stopped rising, many taxi drivers lost their medallions as collateral for their loans, making them significantly worse off. The average debt of a medallion owner is $700,000, crippling many drivers, while the city made $850 million selling medallions under Bloomberg and DeBlasio.

Furthermore, by restricting the number of taxis and assuming that the supply of labour is not perfectly elastic, the drivers that are forced out of the market due to regulation are likely to be far worse off. The relatively low skill required for taxi driving, and subsequent difficulty finding employment in other sectors is a huge problem for taxi drivers who lose their job.

The future for taxicab regulation in New York looks uncertain. Uber and other ride sharing apps offer the most competition to regulated taxi firms, because Uber is not restricted and therefore can freely enter more cars into the market and charge a lower price. In light of the recent crash in medallion prices, the city needs to move away from a model of medallions as private property, as this burdens taxi drivers with a hefty sunk cost, and the loans needed to pay for a medallion eat into profits and drive up the price for consumers.

Overall, the case of New York taxi regulation offers a stark example about why government regulation, when it remains rigid and tone-deaf to market changes, can harm a market more than it benefits it. However, an increase in quality and a reduction in congestion are still valuable to the consumer. Therefore, a strategy of far more delicate regulation, such as opening the market periodically to new entrants and periodically reviewing existing firms to push fares down to an efficient level, would benefit New York in the future.

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