Taken for a Ride by the NYC Taxi Cartel

In a recent Slate.com article titled "Taken for a Ride," the authors ask a good question: "The taxi medallion system in New York and other cities raises fares, impoverishes drivers, and hurts passengers. So why can’t we get rid of it?"  Here are some excerpts:

"When New York’s Taxi and Limousine Commission held a public hearing last week to consider whether to raise taxi fares by 20 percent, cabdrivers pled poverty and passengers argued that fares are too high. Paradoxically, both groups were right.

This lose-lose scenario is only possible under the taxi medallion system, a regulatory scheme in which the right to operate a taxi is thoroughly divorced from the actual work of driving one. It’s a classic example of the perils of financialization, the process through which economic potential is turned into a liquid and leveraged asset. By converting a portion of cabbies’ future revenue into a freely tradable asset, New York, Chicago, San Francisco, and a host of other cities have created a powerful investor class, medallion owners and financiers, whose interests routinely compete with those of drivers and passengers.

“Compete” may be the wrong word, however, since owners of the aluminum placards don’t have much experience with losing. Over the last decade, their victories have driven the price of a medallion from around $200,000 to more than $1 million in New York (see chart above). Medallion owners from Boston to San Francisco have been similarly fortunate, with medallions in Chicago appreciating even faster than the sustained 16 percent per year gains seen in New York.

New York’s tight limits on the number of medallions in circulation has suppressed the supply of cabs. There are 13,237 medallions now outstanding, a few hundred fewer than in 1937, but a huge supply of drivers competing to lease them.  In practice, a fixed number of medallions is just a fact of the system. In New York, Chicago, and Boston, the number of medallions has barely budged since they were issued in the 1930s. New York went 60 years without issuing new medallions, and it's only been a trickle since.

Restricted supply makes for high medallion prices, and that in turn leads to consolidation in the industry. Only around 18 percent of cabs are owner-operated, putting most medallions in the hands of big taxi fleets or brokers who simply rent them out. The limited number of shifts and oversupply of drivers looking to work means that the fleets only rent out cabs by the shift, the shortest term, most profitable way possible."

MP: The "lose-lose" outcome of a taxi medallion system is a good example of "crony capitalism" that has allowed a private taxi cartel to operate in NYC and restrict the supply of taxis in the same way that OPEC can restrict the supply of oil.  Consumers lose, taxi drivers lose, while the medallion owners prosper.

What are the chances of any major changes to the taxi cartel? Probably none, as public choice economics would predict.  The medallion owners are too well-organized, too entrenched in the status quo, and they have the financial resources available for rent-seeking to protect their cartel status.  Taxi customers are dispersed and disorganized, and have limited resources to fight the cartel, so nothing will change. 

As one report on the industry concluded, “A taxi medallion system is nearly impossible to end even if it proves to be providing unfairly high gains to a limited number of original medallion owners. Medallion owners fiercely resist any possible threat that may challenge their advantage.”

The NYC taxi medallion system cartel is a good example of "government failure" and crony capitalism that harms consumers and impoverishes the citizens of New York City, while enriching a small group of wealthy, politically-connected rent-seekers.  Where's the outrage from the OWS crowd, this seems like it would be a good issue for them?