South-Western College Publishing - Economics  
Not Only Can't You Find a Taxi in New York; Now You'll Have to Pay Even More to Not Find One
Subject Increase in Price of Medallion, Requirement of all Taxi Drivers in New York
Topic Equilibrium; Government and the Economy
Key Words

Price; Imports; Market Power

News Story

New York City is raising revenues by selling more "taxi medallions," the little tokens (literally) that are required of all owners of taxicabs that serve the city. New York began the system in 1937 by issuing 11,787 medallions at $10 each, chiefly as a means of stemming deflation of taxi fares. The medallions prevented too many people from deciding to become taxi drivers so that the streets would not become overcrowded with taxis. Reducing the number of taxis available also ensured that those who operated the taxis would derive sufficient income to support themselves and their families.

In 1996, 400 new medallions were added, and over the next two years, the city will auction off another 600, at a cost of over $300,000 each. Generally speaking, only investors can own the rights to own and operate taxis. Drivers must now lease the cabs from owners. It is unlikely that drivers will see any gains in business potential from the new medallion auction, since there will simply be more taxis available. The ultimate gainers will be the investors who can afford the medallions and the taxi franchises that the medallions represent.

Critics of the auction argue that the result is effectively an ineffective consumption tax, because the City government will not get all of the revenue from the medallions and the future business that the medallions represent. If the population in NYC continues to grow, the taxi owners will gain increasing revenue by collecting increasing rents from the drivers as the demand for taxi services continues to grow. These critics argue that the medallion auction goes a long way to explaining why there are so few taxicabs in New York, why the drivers are immigrants, and why no one looks after the cabs.


(Updated June, 2004)

Questions
1.

Limiting the number of available medallions effectively serves as a price floor. Why? Use a graph of supply and demand to illustrate the effects of a price floor.

2. What would happen to market price of taxi rides if the medallion requirement was lifted? Why?
3. The government uses the medallions to raise revenue. Suppose instead of the medallion system (in other words, imagine a world like that in problem 2) the government imposed a sales tax on taxi fares. How would the price of a taxi ride change as a result of the tax? Who would favor moving to such a tax? Who would oppose such a tax? Why?
Source "Taken for a Ride?" The Economist. 22 April 2004.

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