Abolish the Taxi Medallion System


Deregulation Would Benefit Cab Drivers and Passengers Alike

by Irwin Stelzer
Director, Regulatory Policy Studies
American Enterprise Institute
December 1996

One thing you can say for Christpher Lynn - he makes waves.

The city Transportation Commissioner's most recent wave -- a change in traffic flow patterns around the Queensboro bridge, innundating neighborhood streets in stalled, horn-blowing vehicles -- drowned Mayor Giuliani in protests, until it was reversed.

Before that, he bought new vigor to the chairmanship of the Taxi and Limousine Commission (TLC). Or was it just more and better written press releases?

Lynn attacked some of the "quality-of-life" issues impor- tant to the more than 600,000 New Yorkers who use a taxi every day. He increased the amount of information required of cabbies about the city's geography. In a charming effort to restore civility to at least one aspect of city life, Lynn added 50 courteous sentences to drivers' training courses, in the belief that New Yorkers would not fall to the pavement with heart seizures if some driver turned to them and asked, "May I help you into the building, madam?"

Nothing wrong with any of this -- unless it obscures the need for more fundamental reform of a system that is forcing New Yorkers to pay exorbitant rates for inferior service. Which appears to be the case: For accompanying these eye-catching press releases was a series of decisions from which riders are now suffering.

Start with the 20 percent fare increase approved by the TLC last spring. The quid pro quo was to be a limit on the age of cabs. No such luck, as anyone familiar with the ability of regulated companies to game the regulatory process would have predicted.

The fare increase went through, but the industry persuaded the City Council to gut most of the age-limitation rules. So riders pay more, but get no improvement in the quality of their rides.

The sad truth is that no real reform is possible so long as the city refuses to abandon the medallion system that restricts entry into the business of providing New Yorkers with taxi service. The number of medallions was fixed at 13,500 in 1937, and sold for only $10 each. Over the next few years, some 2,000 medallions were returned to the city; no one wanted them.

But that was then and this is now. As incomes rose -- and with them the demand for taxi service -- the city's failure to increase the number of medallions led to fevered bidding for these rights-to-serve. Medallions now change hands for about $200,000 each. Not until this year did the City council authorize an increase, approving the sale of 400 new licenses -- a number too insignificant to affect the monopoly price of medallions.

That cab fares have to reflect the cost of the vehicle, gasoline and insurance and provide compensation for the driver is obvious. Why they also need be high enough to cover the costs created by artificial restrictions on entry into the busness is less clear.

Were the entire medallion system to be abolished -- let's say some courageous, and I do mean courageous, mayor weir to wave a wand, persuade the City council to forego the enormous campaign contributions of the taxi industry and thereby clear the way for the elimination of the medallion entry fee -- fares would drop, just as they did when the airlines were deregulated.

Safety and knowledge tests, of course, could remain in place, as would insurance and other requirements. But fares would be set in a competitive marketplace. Which brings us to France -- Strasbourg, to be precise. Last month, the International Association of Transportation Regulators gathered at the picturesque Alsace town to dine on sole meuniere, sip some good, but not too pricey, French wine and trade notes on the taxi industries in more than a dozen countries, from far off Australia to nearby Germany (which has always expressed an interest in Alsace, in one way or another).

Most of the regulators and industry folk present naturally preferred continued regulation of most aspects of the industry in their home countries. But Rob Patton, a young researcher at the American Enterprise Institute, argued that "carefully designed taxi deregulation will produce significant consumer benefits."

Cruising cabs should be allowed more freedom in setting reasonable prices that will attract business. Brand identification will permit consumers, after a brief learning period, to identify those "brands" -- perhaps by color -- that are cheapest, or have the most comfortable cabs or are distinguished by the most knowledgeable drivers.

This leaves the problem of taxi service at airports, where taxi lines have to be formed, lest chaos reign. Lynn set a flat fare to Manhattan, but this doesn't seem to be working: drivers say that the $30 fare doesn't make it worth their while to drive out to Kennedy and wait for a fare back to town, and there are now reports of shortages of cabs at that airport.

Patton recommends that airports institute competitive bidding for long-term contracts to serve the airport, with the winner being whatever company bids the lowest fare.

In short, the economic problems that deregulation might create are transient and soluble. And the benefits to riders would undoubtedly be substantial. The combined value of all the outstanding medallions comes to some $2 billion, and the carrying cost of this investment, something like $200 million every year, is reflected in the fares that New Yorkers pay every time they step out of a cab.

But don't look for such savings soon, or at least not for so long as the medallion owners count for more with the City Council than do the city's cab riders. Most owners do not drive cabs themselves, but make their money by leasing the service medallions to drivers. That's why we have this anomoly of both high fares and poorly compensated drivers -- everybody loses, except the medallion owners.

Is there any hope for real reform, rather than merely for more of the cosmetic measures that got Lynn so much good ink from the city's newspapers? Perhaps. The city can gradually create more and more medallions, thus lowering the value of these tickets.

Is this unfair? The answer is, "To whom?" The medallion owners have been collecting on their monopoly tickets for a long time. Now it's time to be fair to their customers.

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