DC’s New Mayor Should Say No to Taxi Medallions

I love taxi medallions.

As an example for my microeconomics students, not as policy.

Just last week, I used New York City’s medallion system to show how an entry barrier — the requirement that each yellow taxi have one of a limited number of medallions — could create profits in an otherwise viciously competitive industry.

How much profit? Well, according to the most recent data from the city’s Taxi and Limousine Commission medallions for independent cab drivers traded at between $610,000 and $620,000 in October. If you figure 8% as a reasonable rate of return of this asset, that translates into almost $50,000 in pure profit each year from driving a cab, thanks to the entry barrier.

Good exam question: Who gets that profit? Hint: It isn’t the cab driver, who either has to lay out $600,000+ for a medallion or lease one at perhaps $50,000 per year.

Of course that profit comes at the expense of taxi riders, who face a double whammy: they pay more for the cab rides they can get, and they end up taking fewer cab rides (the latter effect is known as a deadweight loss – society loses the benefit of the cab rides that would have happened without the medallion system).

Given that background, I was horrified to learn from Matt Yglesias that taxi drivers in Washington DC are lobbying Vincent Gray, the city’s new mayor, to introduce a medallion system. Yglesias quotes Alan Suderman of the Washington City Paper thusly:

Derje Mamo, a taxi driver who helped run transportation for the mayor-elect’s campaign, said cabdrivers already are pushing Gray to reshape the Taxicab Commission and allow for the creation of a medallion system. A medallion or certification system would limit the number of cabs operating in the city. Proponents of such a system argue that too many taxis are flooding D.C. streets. ‘He’s got one year, that’s it,’ Mamo said.”

As Yglesias notes, this is a really bad idea. There’s no reason to believe that there are too many cabs on DC streets (except, of course, from the view of cab drivers who hate the competition), and in some neighborhoods there may well be too few. A more plausible concern, as some commenters on his blog note (but I can’t link to because of some glitch), is that current taxi fares might be a bit too low. Taxi fares are still a new thing in DC–until 2008 the city had a zone system that many passengers, myself included, found bewildering–and it may be that the initial levels weren’t set exactly right. If Mayor Gray wants to do something for the cabdrivers, he should ask the Taxicab Commission to ponder whether some upward tweaks to fares might induce some extra supply that passengers would value.

Update: For further discussion, please see this later post.

18 thoughts on “DC’s New Mayor Should Say No to Taxi Medallions”

  1. Of course, if medallions are introduced now and current drivers are guaranteed an allotment, then the windfall will benefit them. I agree with your analysis in the long run, but I’m sympathetic to the cab driver in Yglesias’s story.

    Driving a taxi is a horrible job that will always pay a low wage in a competitive market because anyone with a drivers license can do it (and there’s virtually no way to discriminate between more and less skilled drivers for the casual rider so little or no return to skill). My dad drove for almost 40 years, did it well as far as I could tell, and barely earned a poverty level wage working 6 days a week, 11 hours a day. (I did it for one summer and wouldn’t do it again for 10 times my current salary.)

    So if current taxi drivers get a windfall, I won’t be as sad as you and Yglesias (at least until the next time I have to find a taxi in DC).

    1. Hi Len – It’s interesting to ponder what the optimal system would be to address your concern. A one-time creation of medallions, a la NYC, would give a windfall to the cohort of cabdrivers at a point in time, but would still imply low wages for any future entrants. So I think the optimal system from your view would be something that would create new medallions over time as demand increases (since the point is to benefit many cabdrivers, not give large windfalls to a single cohort). Basically there would be a ratchet that tries to create whatever level of economic rents you want for a presumably-growing-and-changing group of drivers over time.

  2. I think you have overlooked one issue. Increasing the number of cabs on the street increases traffic and the amount of time needed to get from one point to another. My ride from midtown to downtown manhattan will not be cheaper if it takes an extra half hour because more cabs are clogging the streets. If my time is worth anything it may be more expensive.

  3. I think that the ideal from a lifer cabbie perspective would be to have a barrier to entry that is not transferable (neither salable nor rentable). An example of that would be the London system, where cab drivers are expected to absorb “The Knowledge”, a detailed understanding of 25,000 streets and associated points of interest.

    This creates the opportunity to earn higher wages as a return on the initial investment, without the higher wages going to pay the cost of the medallion and without creating windfalls to whoever gets the medallions. Alternatively, you could do this with medallions by making them non-transferable (and have a waiting list for newly created ones as existing cabbies retire or need expands), but you may as well stick in some quality conditions that will help passengers…
    (http://en.wikipedia.org/wiki/Taxicabs_of_the_United_Kingdom)

  4. Why not let the cab drivers and the customers reach their own agreements on price rather than have the price set by the government?

    “it may be that the initial levels weren’t set exactly right” because the government is not as good at price-setting as is a broader market of lots of sellers and buyers.

  5. Pricing cannot fix the problem by itself, regardless of whether it is set by cabbies or government. If it’s a negotiation with customers, there are transaction costs for every trip and probably gouging of tourists. If it is set across the board by cabbies or government, a high price will draw more cabbies into the business and increase the time between fares, meaning that there will be no improvement in earnings per hour.

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  7. I have been driving a taxi since 1983 in Philly and been involved with the politics. The value of the ride of the ride is not only price, but also service. All of the complaints can be tied to the Independent Contractor agreement, an additional value to the medallion owner, whom avoids any responsibility to the service aspect as well as to the “exploited driver” the medallion owner leases to. So the regulator has to step in, whose costs add more to the price of a ride. In every city with a medallion system, drivers whom own a medallion and drive are few but the best and true independent contractor making a middle class living, but most are owned by fleet owners whom do not drive, and lease the cabs to drivers for a lower class living with welfare benefits. The history is interesting too. Before or around 1980, the medallion was a license to protect career taxi drivers from too many cabs cutting their earnings, and protected the companies too. Now it is a property right, and an underground market of deals that benefits a few.

  8. I forgot to mention that I love your insight. Hope you will continue enlightening the public.

  9. a medalion system may benefit for those who holds the license for the required perioddof time weather they serve the public or hold the license without driving for long time.but if limitted number of drivers are allowed to get the medalion,what will be the chance of those drivers who serve the public and their income is based on driving taxi?is there a system that negotiate the drivers not to put them off the road and put them in danger including their family too?imagine that all these drivers spent hard time to have a license and this system doesnot take intoaccount the problem of those drivers who will be out of job but benefit only who has the medalion which mightnot allowed other licensed drivers to work by rent and help the family.

  10. the medallion system is that impose restriction on cabbies to work in some areas is stupid idea. It should be the market that should plays an important role controlling the movement of cabbies not local governments. Create the best economic environment in these area , I can assure the cabbies will go there. It is the responsibility of local authorities to create a peaceful and viable ecomomy in those areas so that the cabbies will be attracted to go there. Otherwise it is unfair the local authorities to use the cabbies as escape goat t for their failure to create viable economies and peaceful environment in
    those areas.

  11. I agree with matt Yglesias a medallion system is a very bad idea. It is opposed by the majority liscensed cab drivers. Many have expressed their opposition to medallion system. Only few lazy cab drivers who hate competition and few cab companies support the idea. It is clear the companies want to make money at the expense of the public and cab drivers. The idea of restricting medallion based on geographical areas is also stupid idea. It is up to the local government authorities to create a peaceful and economic viable envirnment in underserved areas to attract many cabs to go there. However, restricting cabbies to work in those areas is nonesense. It does not solve the problem. Create a business environmen there, i can assure you that cabbies will go there. I think the genuine solution to the problem is to keep the
    statusquo and not to issue more liscences. As the time goes , some will retire and others change their profession and the market will hit the balance. Otherwise , let us not complicate the matter by making many people jobless .

  12. My name is Amarjit Singh.I have been driving D C Cab since 1990.I Have never see D C Government so bad about D C Cab drivers.D C Goverment now a days thinks that they ars manageing the New York City.But I am amazed to know that they dont know that this is not New York City.We can see the streets empty during the day time,when no body on the street walking.Only 2% groth in the city does not translate D C into New York City.I think D C Goverment is dreaming big.But actually this city is for behind their dreams.I think this is the time for D C Concil to wake up and do the right thing for D C Cab drivers.It will be good for us and for them too.

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