Taxi Cab Economics

The New York City taxi industry always amazes me. I got into a cab at 110th Street and Amsterdam Avenue the other evening. It was raining and I had to wait a while for a cab. It was shift change time (more about that later), but he agreed right away to take me. As soon I got in I said hello to the driver and gave him my destination. The first thing he said was “Where are we?” I thought he was joking; he was not. He admitted that he was so mixed up driving around in circles he genuinely did not know what street he was on. Of course I told him and he did get me to where I wanted to go, safely I might add. This kind of thing happens all the time. But generally speaking, I learn a lot from cab drivers. I must admit I don’t often take a cab because of the expense and the poor service. But when I do I know I will meet a driver from one of 86 different countries and there is a lot to be learned. I rode with a Moroccan driver recently across 116th Street and he was playing the wildest Moroccan music on the radio, When I told him how much I liked it he said, “That’s nothin’ man, listen to this!” whereon he took out and tape cassette of Dolly Parton and popped it into an old battery player on the front seat. She was his favorite singer and so I rode into East Harlem with a Moroccan driver playing Dolly Parton. I’ve learned about Com Pas music from Haitians and Zouk music from black Caribbean drivers. And hearing about conditions in Mali up on the Niger border with the rebels, and in places like Ghana and Zimbabwe with their repressive governments. These places are not for the faint hearted. But the drivers are here trying to eke out a living, save a few bucks to send back to their families.

How does the taxi industry work? Simply, there are a fixed number of car licenses called medallions that adorn each of the cabs that are on the street. At the time a car is licensed the owner buys a medallion, a license fee so to speak. But this supply is fixed and is rarely increased by the city. There are about 30,000 medallions out there. So in the secondary market the medallions increase in value. A medallion today is worth around $1.0 million. So a fixed number of medallions means a fixed supply of taxi cabs. Now to the demand side. There is practically unlimited demand regardless of price as there are more people looking for cabs than there are cabs on the street. This is particularly so during rainy weather or during “shift change” time when cars are running with their “off duty” lights on while they are going back to their garages. If they see you some will slow down and ask where you are going and will deign to carry you if not too far out of their way. This usually sparks a spirited negotiation between the fare and the driver as to what constitutes “too far out of the way.” When the City, through its regulatory body, the Taxi & Limousine Commission (TLC) raises its rates, demand dips slightly then rises back to the level that it was at pre-raise.

So we have covered supply and demand. What about pricing? Well the prices are fixed by the government (City). Sound like something from pre-1989 Russia. Well it is. In addition to the base prices for getting into the cab, and for each fraction of a mile and waiting time, there are additional fees. A $0.50 evening fee and a $1.00 late afternoon fee were supposed to be an incentives to keep more cars on the streets at off hours. But when they imposed the $1.00 late afternoon fee, they did not change the driver shifts so there are still less cabs on the street for a $1.00 more in fare. There is a new fee called the MTA fee which is a $0.80 fee which goes to the Metropolitan Transportation Authority (MTA) what what we do not know. It does not come back to surface transportation in New York City. The drivers are responsible for collecting this fee, which effectively makes them tax collectors for the state for which they do not get paid.

Lastly, there is an unlimited supply of labor. If a driver quits in disgust there are a lot of others waiting to take his or her place. The owners know this so they take advantage of the drivers. It costs a driver about $200.00 to take a car out of the garage, with the lease fee, gas, payments and tips to the manager, etc.

So there you have it, a business that is regulated by the city, with a protected limited supply, unlimited labor, fixed prices and in-elastic demand. A good buiness? For the owners sure, for the drivers and passengers” Forget abbout it. And for the Mayor a terrific business, since the owners represent one of the largest sources of industry campaign contributions.