Licensing Has Nothing to Do With Consumer Protection

Yeah, I know, this is volume one hundred and something in a series, but it is such a crystal clear example of government licensing working primarily to protect incumbent competitors in an industry I have to share it.

Suppose you’re the owner of a taxicab company in a largish metropolitan area. One day you notice some taxis tooling around town—and they’re not yours. They belong to an upstart competitor. His cars are newer, his drivers are nicer, and his fares are lower. Pretty soon your profits start shrinking. What are you going to do about it?

You have a couple of choices. Option A: Invest a lot of money in new vehicles, customer-service training for your drivers, GPS systems to map faster routes and so on. A lot of expense. A lot of effort.

So you go for Option B: Invest a little money in a few politicians, who adopt a medallion law: Only licensed operators with city-issued taxi medallions may operate cabs. The oldest cab companies get first dibs on the medallions, at the lowest rates. Only a few medallions are left over for the new guy, and he can’t afford them anyway. Bingo—your competition problem is solved. The customers might not like it, but what are they going to do—walk?

Apparently this is exactly what is happening in DC

Now it’s the District of Columbia’s turn. Four members of the D.C. City Council have introduced a bill that would create a medallion system for the nation’s capital. Medallion prices would start at $250 for the most established taxi companies and, for the newer entrants, run as high as $10,000. At least initially. As time wore on, it’s likely that the price of a medallion would go up for everyone. That’s what has happened in places such as New York, where a government permission slip to drive a cab costs about $600,000. In Boston, which initially capped medallions at 1,525 in the 1930s—and more than a half-century later had added only 250 more—a medallion will cost you $400,000.

At present the District has more than 10,000 licensed taxi drivers; the proposed legislation would establish only 4,000 medallions. Needless to say, such artificially imposed scarcity also drives up prices. A study by Natwar Gandhi, the District’s chief financial officer, found that fares in cities with medallion systems are 25 percent higher than in cities with open taxi markets.

By the way, for extra points, here is a lawsuit right out of Atlas Shrugged

That story has played out in many cities across the United States, with sometimes amusing variations. A decade or so ago, Minneapolis (population 300,000-plus) allowed a grand total of 343 taxis to operate until Luis Paucar, an immigrant, filed suit. The city council decided to allow another 45 cabs. Then the existing cab companies sued, using the creative legal theory that they had a constitutional right not to face competition. (They lost.)

  • chuck martel

    Sure, it's a raw deal for cab passengers and would-be cabbies, but on the other hand the worse it gets, the better it is for the fertile entrepreneurial minds that make up the black market. Even now, gypsy cabs operate in every city of consequence and the unemployment situation has led to an increase that business. You just can't stop people from searching out a deal.

  • Hasdrubal

    I wonder if Natwar Gandhi's report had anything to say about the relative quality and safety of cabs in limited and unlimited taxi towns. I'd be curious to see what effect, if any, limiting the number of cabs has on quality.

  • Old Soldier

    If you surveyed New Yorkers, I bet over 90% would agree that taxis need to be licensed and regulated. If you asked them why, you would get puzzled looks.

  • http://mpc-blog.blogspot.com Matt

    I saw this link at Cafe Hayek. It takes the cake for licensing madness: http://www.nytimes.com/2011/05/27/us/27psychic.html?_r=4&hp

  • ArtD0dger

    Got out of a concert a while ago to find that the line at the taxi stand was 200 feet long. However, a gypsy cabbie approached us as soon as we joined it. We were home in 10 minutes, rode in a much nicer car than a cab, paid less money, AND I got to enjoy the moral approbation of my conscience.

  • Sam

    The NYC Taxi and Limousine Commission also limits what makes & models of vehicles that taxis are allowed to use. Currently there are a bunch (I seem to recall its around 16), but they've recently decided to allow only one vehicle, the Nissan NV200. This has resulted in some major grumbling from those driving less conventional models, e.g. Lexus, Ford Escape Hybrid.

  • http://www.bangkokcoyote.com งานโคโยตี้

    Got out of a concert a while ago to find that the line at the taxi stand was 200 feet long.