Saturday, July 04, 2009

Will D.C. Taxi Industry Become a Cartel Like NYC?

WASHINGTON EXAMINER -- The District’s open, all-are-invited taxicab industry is so saturated with drivers that the entire enterprise is threatened, according to a D.C. Council member who has filed a bill to cap the number of cabs allowed on city streets. Councilman Jim Graham introduced legislation to limit the number of taxicabs in D.C. through either a medallion system, like ones used in New York City and Chicago, or a certification system.

The soaring number of taxicab operators in D.C. -- roughly 8,000, most of whom own their own cars -- is a "pressing and urgent problem," Graham said. There are more licensed drivers in D.C. per capita than any place in the world, he said, and new applicants continue to take the required class, giving them access to the driver exam administered by the D.C. Taxicab Commission. A glut of drivers could jeopardize the chances of any cabbies making an adequate living, Graham has said.

New York City's medallion system, established in 1937 during the Great Depression in response to a ballooning number of unregulated taxis, artificially capped the number of cabs on the road, to what is now about 13,000. The medallion program, however, made it very difficult for the average New Yorker to join the industry as an owner: The May 2009 price for an individual medallion, those held by owner-operators, was $568,000. The cost of a corporate medallion was $744,000 (see chart above, medallion prices have more than doubled since 2004).

MP: Isn't this an example of a "pressing and urgent problem" that would easily solve itself without government intervention, and a problem that will probably be made significantly worse with government intervention? That is, if there really is an excess supply of taxis in D.C. relative to the demand for taxis, that surplus will be automatically corrected and eliminated by firms/drivers exiting the industry in response to low prices and low/negative profits.


Just like a shortage of taxis would be automatically corrected by firms entering the industry, attracted to the "smell of profits" created by the high prices. As long as the taxi industry has easy entry for new firms, and easy exit for existing firms, which seems to be the case, any surplus or shortage of taxis will automatically be eliminated.

By restricting the supply of taxis with costly medallions, that regulatory action will create a government-enforced taxi cartel, with an artificially low number of taxis and artificially high prices. Membership fees to join the cartel will became extremely expensive (more than half a million dollars to join the NYC Taxi Cartel), and the average person will be priced out of the cartel.

HT:
Coyote Blog

31 Comments:

At 7/04/2009 5:27 PM, Anonymous Anonymous said...

You are making good points prof. that make sense but is seems around the world for some strange reasons taxis industry is a cartel. These reasons include:

(1) Security (elimination of potential opportunists)

(2) Use of taxi drivers by police as informants

(3) Artificial creation of wealth

(4) Unions and political influence

 
At 7/04/2009 7:57 PM, Blogger Robert Miller said...

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At 7/04/2009 11:15 PM, Blogger randian said...

But there might a constant supply of new entrants doomed to failure if anyone can slap a sign on their vehicle.

Easy answer: not our (or anybody's) problem.

There was no control over safety and many taxis took you someplace to be robbed or sold into slavery.

What does this have to do with regulating the supply of taxi drivers? Please explain how limiting the supply of taxi drivers will have any effect on whether the drivers commit such heinous crimes.

 
At 7/05/2009 4:37 AM, Blogger OBloodyHell said...

> But there might a constant supply of new entrants doomed to failure if anyone can slap a sign on their vehicle.

I think the experience of others will help reduce this as a problem. Knowing that there's not enough money to be made is a rather adequate pressure to not "hop on the bandwagon"

> Easy answer: not our (or anybody's) problem.

Even better answer.

> There was a glut of both taxis and new gas stations. There was no control over safety and many taxis took you someplace to be robbed or sold into slavery.

Oh, gimme a break. How is this even vaguely relevant here, where, at the least, one must obtain a commercial driving license and so on, just to be a taxi driver?

 
At 7/05/2009 4:46 AM, Blogger OBloodyHell said...

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At 7/05/2009 7:39 AM, Blogger 1 said...

Remember that old saying: 'follow the money'?

The medallion program, however, made it very difficult for the average New Yorker to join the industry as an owner: The May 2009 price for an individual medallion, those held by owner-operators, was $568,000. The cost of a corporate medallion was $744,000...

Hmmm, seem like yet another grab for the wealth of the productive by the parasitic in government...

I mean let's just as a thought experiment say that DC passes this nonsense and caps taxis at 8,000 vehicles...

Let's just say the DC government decides to charge $100K per permit (or whatever) to drive...

There's an interesting chunk of money there for the politicos to waste...

 
At 7/05/2009 11:51 AM, Anonymous Anonymous said...

Just like health care. Government regulates the number of health care providers.

 
At 7/05/2009 3:11 PM, Blogger Robert Miller said...

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At 7/05/2009 3:28 PM, Blogger Robert Miller said...

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At 7/05/2009 7:21 PM, Blogger 1 said...

"City planners do indeed have a role to play in preventing continuous business failure and protecting public safety"...

Amazing!

City planners and government have NO role (unless stated in the city/village charter) in preventing continous business failure...

I sense 'creeping stimulus syndrome' at play here...

 
At 7/05/2009 10:06 PM, Blogger randian said...

At first blush I agree with you, but take a look at the coordination failure among home builders and you'll understand that there are indeed cases where markets fail to properly allocate resources.

I'm not sure what you're talking about here.

But I've seen too many restaurants set up shop in places where other restaurants failed and they thought they'd have better success.

Lots of people think restaurants are easy to run. They aren't. Again, not our problem and not any politician's business.

For the same reason you would likely eat in a restaurant with a business permit and a health inspection but might be less likely to buy from a guy on the corner selling burritos out of a "cooler".

I've bought plenty of tacos from a guy on the corner. I doubt half of them were licensed. Some of them even had ... bacon.

The medallions ensure that cab drivers understand the laws concerning taxi service.

Licensing doesn't ensure quality or competence. Any cabbie contemplating kidnapping a passenger isn't likely to care about losing their license. The stiff prison sentence they'll get for kidnapping and rape/murder is should be adequate deterrent.

 
At 7/06/2009 12:03 AM, Anonymous Anonymous said...

Tell me, how many instances can you point to in the united states where cab drivers without very expensive medallions sold a person into slavery?

Disagreeing with the medallions/limitation on supply does not imply no government regulation. Plenty of towns get by with unlimited numbers of taxis that are registered.

The brands then have an incentive to hire trustworthy drivers. Furthermore the state can and does dictate who can operate for hire vehicles, ie, no criminal element.

 
At 7/06/2009 8:00 AM, Anonymous geoih said...

Quote from Robert Miller: "Well yes, it's a lot of peoples' problems. It's a severe overallocation of resources which is not self-correcting, i.e. market failure."

How is it an over-allocation of resources and how is it not self-correcting?

The whole premise of your argument is meer opinion. Who decides what is over-allocation? Who decides what is the correct allocation?

Under your system (a government system) it would be some politician or bureaucrat who will undoubtedly first consider his own interest. And if he gets the allocation wrong, there will be no consequences for him, only continued power and benefits.

 
At 7/06/2009 1:05 PM, Blogger Dessert Survivor said...

In the early 1970s I was a teaching assistant in a course that used a reading about the New York medallions as an example of regulation gone bad, of government-created monopoly. The question was how could one undo the status quo without causing serious capital losses for those who had bought medallions. It is amazing not only that the system is still intact, but also that others want to emulate it.

 
At 7/07/2009 12:03 AM, Anonymous Anonymous said...

I live in NYC for the last 27 years. During that time the price of Taxicab medallions are up at least 500+%. Taxi drivers have not seen much of that increase, since the market clearing price for drivers remains unaffected by the endless fair hikes and surcharges; the additional cash flows have simply raised the capital cost of the medallions (the right to run a taxicab). Currently I’m the admisntrator for the estate of a 26 year old killed by a NYC taxi last summer. Insurance coverage is limited to $300K per occurrence and $75k per person, each cab is separately incorporated to prevent any further access to assets for additional liability; these are shocking numbers in a society in which middle class parents will spend probably $500k raising and educating a child through college. You might ask how NYC came to such a state of affairs, after all this is a city where million dollar compensation package are not unusual. The answer is that the value of NYC taxi medallions is closing in $750k, so these medallion owners creates a powerful constituency of rent seekers who are busy buying from the political class a long list of favors. Thus when your local DC council person proposes to institute a system like NYC they know quite well that this will create a lucrative source of new tax revenues, but even more important a powerful source of campaign contributions, new bureaucracy patronage jobs with regulators, a medallion brokerage business along with finance, and finally out right bribes an kick backs as this business is increasingly controlled by governmental affairs regulators (one of Jim Graham’s bailiwicks). In short, this proposal is all the evidence anyone would need to know that Ward 1 Councilman Jim Graham is quite willing to be corrupted.

 
At 7/07/2009 12:20 AM, Blogger randian said...

The question was how could one undo the status quo without causing serious capital losses for those who had bought medallions.

The answer is: they lose money without compensation. You have no property rights in a government-created monopoly. It is inevitable that those who benefit from bad law will lose money should we move to better law. Nothing to do but say "sorry" and move on.

 
At 7/07/2009 1:15 AM, Blogger Robert Miller said...

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At 7/07/2009 1:17 AM, Blogger OBloodyHell said...

> you'll understand that there are indeed cases where markets fail to properly allocate resources.


... as opposed to the perfect record of central planning systems?

LOL.

The argument doesn't hold merit because any other system is consistently, with time, far worse.

 
At 7/07/2009 1:23 AM, Blogger OBloodyHell said...

> Becoming "legit" creates too much evidence for you to think you'd get away with your crimes for very long.

Absolutely stupid as an argument for "medallions".

All you've done is evinced a justification for unlimited business licenses for taxi drivers, nothing more.

Total fee? $100, maybe $250.

Such licenses fix every single concern you've used to argue in favor of medallions, which have ONE SINGLE PURPOSE -- to introduce a government-sanctioned monopoly privilege.

Under "free market systems" see "classic techniques used to thwart".

 
At 7/07/2009 1:38 AM, Blogger OBloodyHell said...

> Federal, State, and Local governments have the specified power to regulate commerce under their respective Commerce Clauses.

Thank you for the lesson, Mr. Civics!!

This is a perfect excuse for unfettered regulation of pretty much everything that people do for a living, isn't it?

Oh, wait, that idea absolutely sucks.
-------------------------------------=====

This "power to regulate commerce" was never intended by the founders to lead to unrestricted control over property usage, much less the degree of misuse/abuse it's attained in the last 50 years.


> The 1st restaurant fails and the space changes lessors. It is costly to have the space re-zoned for another use, so the most likely next occupant will be another restaurant. That restaurant fails, and the next, and the next. It turns out there is not enough demand to support another restaurant, no matter how good the owner is.

The problem is NOT the failure of the free market. The problem is the failure of GOVERNMENT. They have misallocated scarce land in a way that creates incentives for successive business failures. Until the city changes the zoning, the problem seldom goes away.


So, you figure, what, MORE GOVERNMNT REGULATION is the solution for what is clearly a f***ed up government policy in the first place?

Governments should generally be strongly limited in their ability to dictate how a property is used. I'll "kinda" grant that there is some social benefit to restricting it a bit -- I probably don't want to live right next door and sharing a wall with a discoteque suddenly -- but for the most part it should be limited to a half-dozen or so primary classifications, with some areas zoned for multiple uses -- "Commercial", "Residential", "Industrial-Manufacturing" are the only three that come to MY mind as legitimate distinctions. I'll assume one can come up with another three or so which might be legitimate.

THAT fixes your damned zoning problem quite adequately, since once the property fails time and again as a restaurant, someone else will figure it for something else entirely.

 
At 7/07/2009 1:52 AM, Blogger OBloodyHell said...

> Back to taxis. If there is a continual problem of hack owners failing to make a profit, there is a problem with the price-information mechanism.

In a free market with no market failure, only supra-normal profits cause entry. In the dysfunctional taxi market, there is entry even though there are no additional profits. This leads to an inefficiently high allocation of resources to taxis


It's called Free Enterprise, bub. You should ponder instead:

a) The alternatives are generally far worse, like spiraling out of control taxi prices... because once you start limiting the number of them, you can guarantee there will be massive political clout applied to both cutting back further or at least limiting expansion of the number of licenses in the face of economic and population expansion.

b) You basically bar the entry to anyone who Has A Better Idea... Suppose someone wants to start a "Green" Taxi service, which uses only Prius's as a vehicle. While I certainly think such an idea would fail as unprofitable, it's not my say that such things shouldn't be tried.

As a matter of fact, it should be subject to no one's imprimatur.

This is how innovation works in a Free Enterprise system.

And your "medallions" do nothing more than bar the entry for said individual(s) from starting such a company, by massively jacking up the entry price.

Q.E.D. -- You may grasp government, Mr. Civics, but you don't apparently grasp Free Enterprise.

Misallocations are a part of any inexact process. Central Planning is woefully ineffective at grasping where such things actually are occurring, and only manage to deal with a narrow range of such problems. And inevitably, by the power they grant to bureaucrats -- usually unelected ones -- they get twisted until they no longer fix the problems they're supposed to deal with OR the problems they naturally fail to deal with.

Government-based central planning of anything but the loosest sort is a long road, if not a short road, to mismanagement.

This is so because it lacks any effective correction methods.

Bureaucrat's don't get fired for not doing their job right, unless it's really really, really obvious. And even there, it requires a lot of pressure from outside forces to cause it to happen.

 
At 7/07/2009 1:54 AM, Blogger OBloodyHell said...

> Bureaucrat's don't


DOH!

"Bureacrats". The apostrophy gnome snuck that in when I wasn't looking.

 
At 7/07/2009 2:52 AM, Blogger Robert Miller said...

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At 7/07/2009 3:04 AM, Blogger randian said...

When 50 cabs are lined up at a given time outside the airport for only 20 passengers and 30 people are waiting on street corners for cabs which never come, you have to admit there's a problem in the market.

I admit there's a problem. Whether there's a problem with the market is another question. Why are taxi drivers doing that? Is there some government incentive or rule you forgot to mention? Cab fares are regulated, could that cause this apparently unproductive behavior? Is it in fact the case that serving airport passengers is more lucrative despite the huge amount of wasted downtime? If so, why?

 
At 7/07/2009 3:26 AM, Blogger Robert Miller said...

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At 7/07/2009 3:45 AM, Blogger Robert Miller said...

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At 7/07/2009 8:30 AM, Blogger randian said...

But where the free market would continually get it wrong because of ingrained government and economic incentives, some brighter-than-average city planner in government might actually admit that he made a mistake granting one too many permits for restaurants in that neighborhood and fix it, especially when the property yields no tax receipts

Ah, I see the problem here. You seem to think that the government should fix failures caused by itself by adjusting its policies, whereas we think the government should butt out entirely. No planner should be making mistakes in how many restaurant permits are granted, because government shouldn't be in the business of issuing restaurant permits. It's none of the government's business how many restaurants open in its jurisdiction.

No, because we observe the "taxi cab problem" existing in places with no regulation.

Which would be where? If there are too many cabs chasing airport fares, and no cabs chasing street fares, presumably there is a profitable competition-free opportunity to chase street fares. My supposition is that this market-clearing function doesn't happen because the would-be entrepreneur can't get a taxi license, such things being a scarce commodity in most cities. Licensed cabs stay at the airport because they don't have to worry about competition taking the business they don't want and either (1) they think the airport is more profitable or (2) they're just plain lazy. If licenses are cheap and easy to get, somebody will service the underserved. Even poor neighborhoods will get some kind of taxi service; witness Detroit's eternal quest to stamp out unlicensed jitney services.

 
At 7/07/2009 10:38 AM, Blogger Robert Miller said...

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At 7/07/2009 12:44 PM, Blogger randian said...

No, there IS NO MARKET SOLUTION to the taxi cab problem.

Yes, there is. Let cabs charge whatever they want. The reason airport fares are "easy" is because cab rates are regulated in every city I've been to, and they can't charge enough on a street fare to make up for the time and gas required to search for them. If street passengers won't pay, then they won't have taxi service. Oh well.

You conclude the restaurant discussion by saying government shouldn't be in the restaurant permit or zoning business

Who mentioned zoning? I was responding to your claim that government should reject a restaurant permit on the grounds that too many previous restaurants at that location failed. If somebody wants to start a restaurant on restaurant-zoned property, the government should have no right to refuse. It's none of their business whether it might be successful, nor is it their business to "protect" people from starting a business some bureaucrat thinks will fail.

As for zoning itself, yeah I don't like zoning. That said, the problem with zoning is that it's too hard to change and too subject to manipulation. One person doesn't like restaurants, one doesn't like retail, and in the end nobody gets to do anything with the land because politicians are cowards by nature and don't want to offend anybody. That's wrong, nobody should have their property made worthless by nosy neighbors.

 
At 7/07/2009 2:34 PM, Blogger Robert Miller said...

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At 2/18/2010 1:58 AM, Anonymous Anonymous said...

I not only have been curtailing the taxi cab industry on the outside, I have been driving one in Denver for almost 7 years now.
I am educated. I started driving a cab not long after graduating from the university of colorado at denver. When in conversation with my passengers in regards to this industry, I would tell them this:
If you want to understand this industry look up the word Racket. It is a Legalized Racket. All at the expense of the consumer. Sure, you as a passenger are a consumer, but so am I as a driver. I am forced to consume this service in Denver by the Government that props and profits off of the cartel it enables. It is not a regulatory action. Legalizing racketeering is not regulatory. How much in a year have you spent on taxi cabs? I would ask this of my passengers. They would normally say, "...maybe 2 hundred or so" I then tell them, I spent $960 for one week! Fact! So, as a fellow consumer,forgive me for having little sympathy with you. It never took too long for me to explain to them how this worked. They were usually outraged withing minutes. I cant figure out why some law firm hasn't taken advantage of this? How about a class action lawsuit? In denver alone, it would be in the mid 100's of millions, providing that drivers were given back pay, minimum wage, social security loss, health care loss plus of course interest. It would cripple denver. It would cripple colorado and every other city that followed suit.

 

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