At what price taxis?
How much would you pay for a monopoly?
Last week, New York City auctioned off 126 taxi medallions, which grant the monopoly right to operate cabs in the city. Among 270 bidders, medallion prices reached $300,000, prompting outrage from some onlookers.
$300,000 sounds like a lot. But is it really? Sure, medallions cost money—but they also earn income. On net, how much is a taxi medalion really worth?
If you ask an economist, he’ll tell you to calculate the present value of the expected future revenue from a medallion, and compare that to the cost.
So let’s do the math. Given a medallion cost of $300,000, how much does a cabbie have to make to justify buying one? Assuming he’ll use it for 20 years, and assuming, say, a 7 percent discount rate—the forgone return he could’ve earned on a similar investment—he’d need to earn about … $28,300 a year.
That’s not much. So how much do taxi drivers actually earn? According to the New York Times here and here, most drivers pull in about … $30,000 a year.
So it turns out those medallions may not be so expensive after all, and a little simple economics helps us see that.
Of course, this doesn’t answer the important question: whether taxis should be a monopoly in NYC, or whether medallions should be made cheaper by allowing more of them. But it does help us resist the temptation to hastily denounce medallion prices as “unfair” just because their price looks large in absolute terms.
Still not convinced? Go do the numbers—download the Idea Shop’s “Should I Buy that Taxi Medallion?” decision-model here [MS Excel spreadsheet].
Fun for the whole family.
[Update: Jim Henley adds a some complexity to this back-of-the-envelope calculation here.]
[Update 2: Tim Lee adds more on taxi driver’s opportunity cost of time here—though in the model above this can be accounted for by simply adjusting expected future income streams downward…]
[Update 3: Tyler Cowen has more on the economics of optimal taxi regulation here.]
[Update 4: Will Baude has more on intertemporal problems with stable taxi quotas here.]
[Update 5: Via email, a reader suggests three things to make the above calculation more realistic: ”(1) The $30,000 annual income often reported is net income—net of a leasing fees paid to the medallion owner. (2) Cabs run around the clock, a single cabdriver does not. A medallion owner can use the medallion himself for 8 to 12 hours per day, and then lease the medallion to someone else for the rest of the hours—the medallion stays with the cab, not the owner. (3) A medallion can be sold, so it has more than a twenty year useful life.”]
Posted by Andrew on Thursday May 27, 2004 | Feedback?
