Wednesday, November 9, 2011

Make the rules or your rivals will: the economics of taxis in New York City

The NY taxi cartel, like a lot of other bad ideas, started during a crisis:
When the Great Depression hit New York and the city’s 30,000 taxi owners couldn’t pay their bills, the city’s impulse was not unlike that of the Roosevelt Administration in Washington: limit supply, so that demand would be adequate to support the suppliers left standing. FDR’s plans were (thankfully) declared unconstitutional, but New York City’s taxi cartel was there to stay. To operate a yellow cab and solicit passengers on the street you need a medallion. And the number of medallions is fixed at 13,237 – roughly 3,000 fewer than in the year (1937) the system was created.

A recent auction of a medallion was $1 million, which suggests the following break-even analysis:.
...let’s say the expected return on a $1 million medallion is seven percent annually (a low figure in light of the risks). To meet expectations, fare would have to be high enough to yield about $200 a day in profits. Yes, that’s right: $200 a day, after netting out the cost of drivers, fuel, maintenance and vehicle depreciation!
Is there any chance of reform? Sadly, the taxi cartel illustrates why it is so hard to undo these regulations:
If corporate medallions are worth $1 million each, the whole lot of them is worth something north of $10 billion (owner-operated medallions are presumably worth less than $1 million). And the owners are hardly likely to give up this unearned, government-defended surplus without a struggle. In any event, there’s no one around willing to give them a fight.

1 comment:

  1. I believe it's even worse than this. The medallions originally sold for $10 in 1937. This equates to roughly 17% per year price appreciation from then to the $1 million medallion sold in 2011. That $200 minimum net is more like $465.