The medallion system is a classic illustration of what economists call "rent-seeking" -- manipulating the political system to gain economic benefits without providing any additional value to society in exchange. Imposing caps on the number of taxis enriches existing owners with windfall profits. But by making the cost of cab ownership obscenely high, it prevents countless would-be cabbies from going into business for themselves. And by stifling competition, it drives fares through the roof while lowering the quality and availability of service.
New York isn't alone in blighting its taxi market like this. In Boston, which also adopted a medallion system in the 1930s, the little metal plates now sell for $400,000 and cab fares for most rides are the highest of any big city in North America. The number of cabs is limited to 1,825, which is why trying to get a taxi in the city's outlying neighborhoods can be so tough. Cabbies -- most of whom can't afford a medallion of their own and instead must pay stiff fees to lease somebody else's -- naturally gravitate to the most lucrative routes.
Even more obnoxious is the government-protected monopoly in Milwaukee, which in 1991 imposed a citywide cap of just 321 taxis, yielding a ratio of 1 taxi for every 1,850 residents. (By comparison, the ratio in Boston is about 1 to 340; in Washington, DC, where the number of cabs is not artificially limited, it's 1 to 90.) The cost of a taxi permit has soared from $85 to $150,000, which is well above the price of an average Milwaukee house.
"In the classic story of entrepreneurship, someone starts a taxi business in order to save up enough money to buy a house," says attorney Anthony Sanders. "In Milwaukee, you need to save up enough money to buy a house just to start a taxi business." Sanders works for the Institute for Justice, a public interest law firm that litigates around the country in defense of the right of individuals to earn an honest living. The institute, which successfully defended reforms that ended a taxi cartel in Minneapolis, recently filed a lawsuit challenging Milwaukee's cap on taxi permits as unjust and unconstitutional.
Can you imagine City Hall trying to fix the number of shoe stores or web designers or CPAs allowed to operate in town? Arbitrary limits on the number of taxicabs should be considered just as ridiculous. The government has no right playing favorites, or crushing competition. The Institute for Justice describes itself as advocating for fairness and economic liberty; what it really seeks to protect is the American Dream. In Milwaukee today. In New York and Boston, perhaps, tomorrow.