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Monopolistic Competition 339

New York City’s

Taxicabs

Revisited

Over the last 70 years, New York City’s taxi commission has kept the number of medallions

(legally required to drive a taxi) nearly fixed. Currently, there are 12,487 cabs to serve a

population of some 8 million. Cabs are never around when New Yorkers want them. Yet

the market price of medallions (bought and sold weekly) is over $250,000. It would seem

there is significant unfilled demand for taxi service and a substantial profit to be had

from supplying it.

The New York taxi market is a classic case of a monopoly restriction on output—

sanctioned and maintained by government regulation. Although there are economic

grounds for government regulation in many aspects of this service (fare rates, safety and

maintenance of cabs, conduct of drivers), an absolute restriction on entry does not appear

to be one of them. Consider the following hypothetical, but plausible, illustration. Weekly

demand for trips is

Q  7  .5P,

where Q denotes the number of trips in millions and P is the average price of a trip in dol-

lars. The taxi meter rates currently established by the commission (after a 25 percent hike

in 2004) imply an average fare of P $10 per trip. The current number of licensed taxis

is 12,487, and a taxi, if fully utilized, can make a maximum of 140 trips per week. The typ-

ical taxi’s cost of carrying q weekly trips is

C  910 1.5q.

This cost includes wages paid to the driver, a normal rate of return on the investment in

the taxi, depreciation, and gasoline.

These facts allow us to prepare an economic analysis of the taxi market that addresses

a number of policy questions. Is there an insufficient supply of cabs? The answer is yes. If

fully utilized, the current number of taxis can supply (12,487)(140) 1,748,180 trips per

week. But demand is Q  7  .5(10) 2 million trips. (The supply shortfall is 13 percent

of total demand.) Are medallion holders (fleet owners and individual taxi owners) earn-

ing excess profits? The answer is yes. The cost per week is 910 (1.5)(140) $1,120 for

a fully utilized cab. The average cost is $1,120/140 $8 per trip. Cab owners enjoy an

excess profit of ($10 8)(140) $280 per week, or $14,560 per year. A medallion enti-

tles the owner to this excess profit each and every year. Thus, it is not surprising that the

market value of a medallion is $250,000 or more. (At a price of $250,000, the medallion

earns an annual real return of 14,560/250,000 5.8 percent; this is in line with real

returns for other assets of comparable riskiness.)

Are consumer interests being served? Surely not. At the very least, the commission

should increase the number of medallions by 13 percent so that trip supply can match trip

demand at the $10 fare. Current medallion holders would continue to earn $280 excess

profit per week (along with new holders), so they would feel no adverse effects. A more

dramatic policy change would be to do away with the medallion system and allow free

entry into the taxi market by anyone who wishes to drive a cab. What would be the likely

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