Opinion

Felix Salmon

Why taxi medallions cost $1 million

By Felix Salmon
October 21, 2011

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What on earth is going on with the price of taxi medallions in NYC? Two of them just sold for $1 million apiece — that’s a 42% increase just since August, when conventional wisdom had it that $705,000 was a top tick and that medallions would soon plunge in value.

Derek Thompson reckons that this is a sign of how great New York’s economy is doing:

It’s all about supply and demand. The tailwind behind medallion inflation is a cap on taxi cab licenses. Even as the economy of New York City grew at a furious pace across three decades, the number of taxi plates stayed basically constant, despite wage growth and population growth and rising demands for cross-town transportation. As a result, their value rose tremendously.

One problem with this theory is that if you look at the chart of medallion prices, it doesn’t seem to bear much relation to the strength of New York’s economy. The majority of the rise in price has happened over the past ten years, which haven’t been particularly great, economy-wise. And certainly there hasn’t been any citywide boom in the past two and a half months.

Jacob Goldstein has a similar theory.

Every cab in New York City has to have a medallion. And the city strictly limits the number — currently just over 13,000. So as New York has prospered over the past few decades, the price of medallions has gone through the roof.

The economics of this, however, don’t make a lot of sense. Cabs might get a little bit busier when economic activity picks up, but most of that extra income is taken home by drivers, rather than the owners of corporate medallions. (Corporate medallions are the ones where the owners don’t drive the car; they’re the ones being charted here.) The income from a corporate medallion is pretty steady, and was spelled out in the comments to this post:

The maximum amount a cab leased out to drivers can earn over a year is $82,524. This assumes that the cab had a driver every day and every night and that it never breaks down. The day shift maximum charge is $105. The maximum night shift charge is $129 and that is only for Thursday-Saturday. Sunday-Tuesday is $115 and Wednesday is $120.

You’ve also left out of your calcultions the cost of the car. Let’s call it $27,000 and you are required by law to buy a new one every 3 years.

This is the real reason why medallions are so expensive: good old-fashioned interest-rate calculations.

We’re basically talking about a real income stream, here, of about $75,000 per year. (Let’s assume, for the sake of argument, that the income from a taxi medallion rises at the same rate as inflation.) That’s a real yield of 7.5% on a $1 million investment — which isn’t half bad at today’s interest rates.

Put it this way: how much would a bond paying a real yield of $75,000 a year cost? At the most recent auction, the 29-year TIPS cleared at an interest rate of 0.999%. At a 1% real yield, an income stream of $75,000 a year would cost you $7.5 million.

Now you don’t actually get $75,000 a year if you own a medallion. You have to pay for maintenance, insurance, and workers comp; you also have to pay someone to manage your drivers. But even if you bring the income down to $50,000 a year, that’s still a pleasant 5% yield on your money, and what’s more it’s a yield which behaves much more like a real yield than a nominal yield. Paying $1 million for such a thing doesn’t seem silly to me, especially when there’s a lot of room for capital gains as well.

Of course, there’s risk here too. Any time you see a chart like the ones above, you have to worry that there’s a bubble. Plus, there’s political risk: the mayor can print new medallions, making the existing ones worth a little less (but not a lot less, given that the income from medallions is largely fixed).

That said, medallion owners have a lot of political clout, and historically they’ve been good at making sure that their income is maximized, rather than suffering anything which might reduce it. And when Goldstein starts dreaming of taxi deregulation, he quickly enters cloud-cuckoo land:

The medallions create a textbook example of what economists call rent-seeking behavior: Basically, gaining extra profits without providing extra benefits. If the number of taxis were allowed to increase (and if cab fares were unregulated), the number of taxis would increase and the price of a cab ride would fall.

No! if the number of taxis were allowed to increase, then the number of taxis would increase. Of course. That’s just a tautology. But the price of a cab ride would not fall, because that’s a separate piece of legislation — the price of a cab rate is set at a predetermined rate, and indeed has to be set at a predetermined rate. If you deregulated cab fares, utter chaos would result — New Yorkers would basically have to haggle over the cost of a fare every time they got into a cab.

Goldstein’s not the first person to have this cockamamie idea: Jim Surowiecki said the same thing in 1999. But in order to have a market where prices are set by supply and demand, people need to be able to choose how much they’re willing to pay to take a cab. And you can’t do that when you’re standing on the sidewalk (not in the bike lane, please!) sticking your arm out and trying to hail the first cab to turn up. In order to make that transaction work, the fare schedule has to be set, in advance, by the municipal government.

But I do worry that the way fares are set, too much money ends up going to medallion owners. If fares were brought down, the amount that medallion owners could charge drivers would also come down, and medallion prices would — finally — start to fall. Why does NYC ever raise taxi fares, when the income from those fares ends up going overwhelmingly to a handful of millionaire medallion owners? These medallions, right now, are licenses to print money. That’s why they’re getting extremely expensive. But it doesn’t need to be that way.

Comments
22 comments so far | RSS Comments RSS

>>>If you deregulated cab fares, utter chaos would result — New Yorkers would basically have to haggle over the cost of a fare every time they got into a cab.

I don’t follow you, though I don’t live in a burg where taxis are widely used. Most American industries are not price-regulated, yet haggling is not at all ubiquitous. It’s conceivable, for example, that cabs would have a big sign on the door with the per-mile rate (or whatever the fee is based on), which you could simply wave by if you found it unreasonable. I can think of reasons why deregulating cabs would be a bad idea, but I’m not seeing this particular one.

Posted by ktheintz | Report as abusive
 

Felix, surely it is not beyond your imagination to envisage that taxis could advertise their rates on the outside of the cab. Fares with strong time preferences might, indeed, take the first available cab, while those who aren’t in a terrible hurry would likely wait for a better fare. Would that really constitute “chaos?”

Posted by RLehmann | Report as abusive
 

Just to clarify, is it the case that medallion lease rates are regulated as well?

Posted by dWj | Report as abusive
 

In Peru, cabs are unregulated and omnipresent. Basically, every car in a Peruvian acts as a cab from time to time and many all the time. No prices are listed. Everybody knows exactly what the standard price is. There is no need for haggling.

Posted by DavidCIT | Report as abusive
 

Hidden in plain sight, Europe’s largest city. The population freely “haggles over the cost of a fare every time they got into a cab.” However, Muscovites are better equipped to deal with a free market in cab services than New Yorkers. Utter chaos is avoided.

Posted by johnhhaskell | Report as abusive
 

DavidCIT,

Out-of-towners certainly do not “know what the standard price is”, and in many cases have language barriers to overcome as well. Anybody who has travelled extensively has at least one horror story of getting ripped off by an unregulated taxi cab to tell…

Posted by mfw13 | Report as abusive
 

Does anyone how the city justifies limiting the number of medallions? Wouldn’t New Yorkers want as many taxis as possible cruising the streets?

Posted by Stevensaysyes | Report as abusive
 

> No! if the number of taxis were allowed to increase, then the number of taxis would increase. Of course. That’s just a tautology.

Nitpick: this is not tautology. Perhaps it’s not very insightful, but still this is an unfairly dismissive word to use. There can be and are things (though not taxis) for which this statement would be wrong: i.e. they have reached an equilibrium in their number, while remaining fewer than, or the same as, a government imposed limit.

Posted by bxg6 | Report as abusive
 

would be nice for city to sell 1000 licenses for $1B, no? beats issuing bonds at whatever percent

Posted by q_is_too_short | Report as abusive
 

You must live in a bubble if you think that “utter chaos” would result if the taxi fares were not standardized, because that’s the way it works already for most of New York City. Most of the city is not served by yellow cabs, which tend to stick to midtown and downtown Manhattan and the airports. Uptown and most of the other boroughs are served only by livery cabs which are not legally allowed to pick up passengers who hail them from the street, but do it anyway. And while there is an official minimum fare, after that there’s no meter and it’s resolved by haggling or by popular knowledge about what the “right fare” is.

That’s the way it works in many cities. Sure, it may seem a chaotic to outsiders, but it works pretty well and I wouldn’t call it “utter chaos”. Yes, the tourists usually are overcharged.

Posted by qrt145 | Report as abusive
 

Seattle has a deregulated cab system, but it is controlled by a number of large corporations that set the prices and handle dispatch. They have to post fixed rates, including the price for getting downtown to and from the airport. In most of the city, it is impossible to hail a cab. The density just isn’t high enough, so most cabs are on radio call like New York City black cars and gypsy services. It isn’t chaos, but I’ve never had a ride with some Joe Blow who just set himself up as a one man cab company.

Posted by Kaleberg | Report as abusive
 

So, how many potential jobs are being regulated away at the behest of this cartel? It feels very Greek to me.

People want to make a living, jobs are scarce. Taking people from point A to point B is a relatively simple task, running a cab company by radio and dispatch is a little more challenging, but it’s a very projectable business.

On each monopoly I encounter, I tend to ask: Is it a natural monopoly and thus tolerable and in need of regulation to prevent excess. Or is it an artificial monopoly, which is created to serve the interests of a certain group. The intersts of New York City here should be naturally to prevent over congestion of the city through an excess of cabs. The question needs to be: Is there more usable road space and would there be more cabs viable to serve the demand for tansportation. Would this additional supply lower fares for customers and thus serve a more efficient market.
If the answer is yes to both questions, then not expanding the number of cabs is a decision that consciously enriches the license holders and impoverishes everybody else.

Restating the obvious sometimes helps.

Posted by Finster | Report as abusive
 

I’ll buy the argument that the price makes sense based on cash flow, but what explains the trend? That graph doesn’t match interest rates.

Maybe investors just discovered medallions as an asset class?

Posted by AndrewNYC | Report as abusive
 

As smartphones become ubiquitous, it could allow this sort of change in the market. You start the app to flag a cab, are provided with fare bids and an estimated time until you are picked up, (and user feedback on the accuracy of these time estimates!) and choose the one you want. An app like Taxi Magic is halfway there already.

Posted by BradH | Report as abusive
 

I would venture another line of explanation for those sky-high medallions costs. Taxis are largely a cash-based business and operating them is of prime interest to money launderers.

I seriously question the potential income estimates. $82,524 a year? It doesn’t tell the whole story, particularly if laundering is involved.

The current base rates for NY are :
- $2.50 per load-in
- $0.40 per unit

One unit is charged :
- Every 1/5 mile, when the taxicab is traveling at 6 miles an hour or more; or
- Every 60 seconds when not in motion or traveling at less than 12 miles per hour.

Source: http://www.nyc.gov/html/tlc/html/passeng er/taxicab_rate.shtml

Essentially, it means that at least 60 units are charged every hour while a passenger is loaded, regardless of the distance.

So, the absurd case of a cab running 20 hours a day at 80% and loading 2 rides per hour (a very ‘well run’ cab) will take in an absolute minimum of $484, running at less than 12 mph, not taking into account surcharges, peak hours, etc. $170,000 a year.

Factoring everything else, I’d say you can easily launder $400,000 a year in cash with a ‘well-run’ cab.

That’s a lot of money and that’s worth a lot of money.

My $0.02…

Posted by Frwip | Report as abusive
 

“No! if the number of taxis were allowed to increase, then the number of taxis would increase. Of course. That’s just a tautology. But the price of a cab ride would not fall, because that’s a separate piece of legislation”

Then you say the medallion owners are wasting their considerable political clout every time they go on the warpath against proposals to let non-yellow cabs pick up street fares? As they recently just did again?

If so, they are stupid for not realizing that the law of supply-and-demand has been repealed for the taxi industry.

OTOH, if a sufficient increase in the number of cabs picking up fares reduces the fares per medallion, how is legislation going to keep the revenue per medallion from falling? When it does fall, what will the medallion owners do to the price of a cab ride to keep their cabs from driving around empty? Even if they must use their considerable political clout to do it?

BYW, there is no reason whatsoever to think “utter chaos” would result if the city govt didn’t fix the price of a ride. Markets self-organize all the time, countless examples, including all the non-yellow taxis in NYC.

Posted by Geezerman | Report as abusive
 

FRWIP – While driving a cab is a cash-based business with potential for money laundering, I don’t think that owning a cab medallion and leasing it out to a driver is likely to be nearly so-cash based nor present the same money laundering opportunities. The lease payments made by the driver to the medallion owner are probably not in cash, but even if they are, they would be limited to $82k (unless there is a whole black market in leasing cab medallions).

Posted by bklawyer | Report as abusive
 

you economists are so quick to attach all kinds of economic theories and formulas you miss the obvious reasons. The reasons NYC taxi medallions appreciate at such a rapid pace are as follows: One, yes supply and demand most definitely is a major component and has two parts. One part is as the number of potential passengers and fares increases and the medallion suppyly remains constant, their value will appreciate. The second part is the fixed amount of medallions NYC has on the streets.
Factor two is the regulatory environment created by NYC and the contractual promise given to a medallion owner to operate on the streets of NYC. This permanent license to generate revenue enhances medallion value.
Factor three are the stringent lending parameters put in place by medallion lenders, which include public and private institutions. There is no predatory lending in the medallion industry and there is no such thing as a subpar loan. All loans are grade A paper.
And the fourth factor is fear. Medallion buyers drive the price up because it’s a buy now mentality. They’re afraid if they wait, they’ll pay more. End of story.

Posted by g8r82ny | Report as abusive
 

I think that paying $1 million is a bad investment. There will soon be other alternatives including bike sharing, pedicabs, car sharing, limos and someday, robotic cars. Cars have already been tested which can drive city streets without human drivers.

It is really a scam that this artificial price level has been created with the colusion of the government soley for the benefit of taxi medallion owners. Increase the number of medallions, earn some money for the city, make more cabs available for consumers.

Posted by manhattandave | Report as abusive
 

Interesting stuff, however one part that is not clear to me are the charts showing returns in comparison to the S&P500.

The chart on the right showing the percent change is, I believe, adjusted for inflation in the case of the S&P but the medallion returns do not seem to match the visual for the inflation adjusted price of the medallion.

This (from a rough glance) has risen from an inflation adjusted $70-80k to $1000k a rise of 1200-1500%, not the near 7000% shown.

Am I reading this incorrectly?

Posted by fade54 | Report as abusive
 

Really I have to explain this to you? *sigh* this is so sad. yet another example of why a revolution needs to take place. Ok, listen up, this is not complicated. As the economy tanks, what has happened? More and more unemployed people, trying to find a way to make some kind of green, for food, houseing, clothes, you know, those pesky things all you idiot ass-hats with money think just grows on trees. The more unemployed desperate people there are out there, the more people are going to start looking at alternative ways to ear, like, “Hey, maybe I could drive a taxi?” Now you got all these hungry desperate people all trying to get a taxi medallion. It is supply and demand, the demand for employment vs. the supply which is non existent. Hence, $$$$ medallions that will only rise in price as this depression continues. You got this taxi driver who couldn’t possibly be bought off, nothing you could say or do would make him give up his medallion, it’s the only thing feeding him and his family. so hence, this item is an item beyond measure.

Posted by Anjilyn | Report as abusive
 

I don,t think you know the real reason why the medallions went up in price.The real reason is that you can depreciate the meddalion over 15 years.Which means that if you bought a fleet medallion at 1,350 million dollars then you would be able to deduct off your taxes 90 thousand a year in depreciation.Which for most people with money that would be about 45,000 a year in savings just from that.

Posted by reasonably | Report as abusive
 

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