No Cabs?! Thank a Medallion!

No Cabs? Thanks, medallions!
Have you ever waited on a street in Boston, looking for a cab, only to never find one?

Have you ever called a local cab company, only to hear a continuous busy signal?

Have you ever been surprised by your cab fare?

All of these frustrations may be traced back to one thing: regulations and the medallion system.

No Cabs in Sight
It’s no secret that markets work on a system of supply and demand. Taxis are different.

If the market were stable, that is – there are a constant number of people that require a taxi each minute, they are all going to predictable destinations each trip, and each taxi has the same operating costs from day to day, then a fixed “supply” would be sufficient to satisfy demand.

This is a fairy tale.

When the weather changes, more people seek out cabs than “normal”.  People decide to take cabs to infrequent social engagements throughout town.  Energy costs change by the day and machines break down.

So what does this have to do with not getting a cab when you want one?  They are connected because City Hall fixes the number of medallions by law (at 1,825 for the city as of 2011).  Because of this, the system’s capacity cannot adjust to fluctuations in demand.

In any other market, if people want more of an item, producers make more, and the prices come down. 

In the cab industry, City Hall pretends to know the magic number. This guess is met with failure every day.  To add one more medallion, it takes an act of City Hall – and then, how many more do you add?  Will it be enough for the next big concert? For a baseball game? For the Marathon?

Whatever number they “pick”, it is bound to become inaccurate – and we will wait for cabs.

Hello?! Yes…I’ll hold.
The medallion limits outlined above manifest other problems.  One of which is that because they are limited – scarce – they are expensive.  Real expensive. In one instance that piece of metal was sold at auction for $400,000!

What does this have to do with a busy signal?  Well, when a license to operate “legally” is that expensive, the barrier to entry into that particular market is very high.

If an out of work entrepreneur wanted to hire out his vehicle to provide a service and make some money, they would need to 1: have perfect timing so that a medallion is available, 2: have a few hundred thousand dollars lying around (if so, why would they be out of work?), and 3: navigate the legal requirements to drive the same streets they have been driving for years.

Nevertheless, this barrier to entry means that “big players” with deep pockets will most likely dominate the market – beginning to resemble a monopoly at this point – and when there is a monopoly, competition dies away and consumers suffer.

Of course they know you are calling for a cab.  Of course you know you want a cab.  Who else can you call, though? There are no real competitors!

The busy signal continues.

How much?!
$2.60 just to get in the door.  $2.80 per mile - charged at 40¢ for every 1/7 mile. Quick, is Newbury Street 1/7 or 2/7 miles long?

Idling time is $28 per hour – at 46¢ per minute! Is Storrow Drive busy?

Who sets these rates anyway? The answer? City Hall. 

Well, not really.  There is an “Inspector of Carriages” who is a “Boston Police Superior Officer”, and they are part of the “Hackney Carriage Unit” – founded in 1894 (maybe 1/7 mile was more common then). I think they set the rates…I don’t know (http://www.cityofboston.gov/police/hackney/taxi.asp).

What is easier to tell? Who doesn’t set the rates - that is easy. The customers and cab drivers have no say.

Why should we allow supply and demand to set prices? Because it is a feedback mechanism for the market.

If a company has bad service or products, they can do one of two things: lower their prices or improve their products.

The point is this: if a cab company wanted to lower their price to attract more business, they are prohibited from doing so by law! Have you ever received a free coffee because your order was wrong? That is an illegal transaction for a cab.

Conversely, if a company wanted to offer services that required more than the established rate, they would never make a profit, and thus, they would probably never try!

Following City Hall’s logic, why wouldn’t they regulate every price? Bread? Gasoline? Shoes?

The reason is that price controls always fail in the end. They create shortages, cause “black markets”, and impair innovation. If City Hall tried their same methods on the products listed above, this would become obvious to all.

Until then, bring a calculator – you are prohibited from working a deal on your own.

Ideal System
An ideal system would have the following principles

• No limit to the number of cabs that can operate (the market can adjust).
• No prohibition on who can operate a cab (no special favors).
• No price controls (individuals decide).

This system may sound like chaos, but it is simply applying the same principles that work every day to bring us all kinds of consumer products at reasonable prices.

Companies would have an incentive to compete, and consumers would be able to exercise real choice.

Regrettably, the current system will probably never change. There is too much money involved in the medallion system, and the government never relinquishes power.

In the end, we all lose.

Have fun waiting on the sidewalk with a busy signal.  I’ll see you there!