Regulatory Capture and Taxi Medallions

As Stigler points out, every industry that has the requisite political power will try to restrict entry. One of the most egregious examples is New York City’s taxi industry. In 1937, New York City began to issue taxi medallions, a license that a taxi driver is required to purchase to operate in the city. At the beginning of this program 13,585 medallions were issued at a cost of $10 each. Over time, taxi companies and independent drivers began to view their medallions as an asset and restricted new medallions from being issued. Despite an explosion in New York’s population, only two additional medallions have been issued since 1937. By 2013, the price for a medallion had risen to $1.3 million dollars. 

The taxi medallion example also demonstrates the consequences of an industry that can no longer limit competition. Because of the high costs of entry, New York taxis can charge higher rates than the competitive market would allow. In the last few years this has allowed Uber and Lyft drivers to undercut taxi rates without having to purchase a medallion. As a result of increased competition, the value of taxi medallions has plummeted to around $250,000. Those who purchased the medallions at their peak value are now left with a greatly depreciated asset. As this story demonstrates, regulatory capture has the potential not only to harm consumers, but also workers within the restricted industry. 

As this article points out a major argument in favor of taxi medallions is their ability to limit congestion. While congestion is an important negative externality to account for, it does not necessitate the use of medallions. New York City already places a congestion surcharge on every trip taken by taxi or ride sharing app. Another argument made in favor of medallions is that they raise the wages of taxi drivers. While this may be true, the use of medallions also puts forth massive fixed costs to enter the industry and burdens medallion owners with a risky asset.