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Not an equilibrium

By Eric Crampton • 06/12/2012


So taxi cab tips are up consequent to a new credit card swipe system that encourages large tips. Cheap Talk and Marginal Revolution have both noticed.

Here’s Alex Tabarrok:

Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.

But does this make the drivers better off? Not unless they own the taxi medallion!

Joshua notes that the new charging system started in 2007.

Recall that New York City taxicabs are heavily regulated: the right to run a cab has to be purchased. The medallion giving you the right to run a cab is expensive. The 2004 annual report of the Taxicab and Limousine Commission gives the price history from 1947 to 2004.

They stopped publishing that graph in subsequent years’ annual reports, but they do report average sale prices:

  • 2005: $350,000 individual, $391,000 corporate
  • 2006: $411,000 individual, $525,000 corporate
  • 2007: $420,964 individual, $573,489 corporate
  • 2008: $550,000 individual, $747,000 corporate
  • 2009: $584,000 individual, $775,000 corporate
  • 2010: $624,000 individual, $850,000 corporate
  • 2011: $699,000 individual, $1,000,000 corporate
  • 2012: Average annual prices are not yet available. 
Every year when I teach my public choice class, I look up the taxi medallion price when I lecture on transitional gains traps. And I’ve been a bit puzzled about why the prices seemed to skyrocket during the 2008 recession and onwards; the top line of the graph above, $350,000, seems pretty low compared to where things are now.
I added red bars at the bottom of the chart above for NBER recessions, although the really poor resolution on the original PDF makes identifying years a bit tough. Note also that the first few years aren’t to the same scale as the rest: 1947, 1950, 1952, 1959, 1960, 1962, 1963, then annual ticks thereafter. You can really see the dip from the 1991 and 2001 recessions, though the latter recession’s dip started prior to the recession. But the 2007-2009 downturn was surely larger than the prior recessions, and was accompanied by a strong increase in medallion sale prices. This puzzled me until now. The present value of the potential rents increased with the new fare system, so medallion prices went up.

This surely then was accompanied by an erosion in non-tip payments to drivers since the market for driving cabs is competitive, even if the right to run a cab isn’t. This is my prediction; I haven’t been to New York in a while. Maybe somebody who knows can tell me whether I’m on the right track. 

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