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416 CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS

APPLICA TION 10.5
Quotas for Taxicabs In recent years many cities have increased the

number of medallions, with the goal of making the
The taxicab industry has the features of a competitive market more competitive. For example, in the early
market. There are many small consumers of taxi ser- 1980s Chicago had a restrictive quota system with
vice, and if entry were unregulated there would also only two major suppliers of taxi service (Yellow and
be many firms providing service. However, in many cities Checker). The number of medallions had been set at
around the world, taxis are regulated. Sometimes 4,600 in 1959 and not increased since that year. In
government control takes the form of direct price 1987, Yellow and Checker owned 80 percent of
regulation. More often cities restrict the number of those licenses. In that year the city government initi-
licenses authorizing a taxi to operate on the street. ated a program to increase the number of medal-
Historically, the licenses have often been metallic ob- lions gradually over time. In 2009, Chicago had
jects (called medallions) issued by the government to approximately 6,900 medallions, and the city an-
certify that the driver has permission to provide taxi nounced that it would soon auction off an undis-
service. These days, a medallion is often just a paper closed number of new medallions. The last auction,
document. in 2006, had resulted in auction prices of $78,000 per
It is not surprising that taxi fares are substan- medallion.
tially higher in cities with quotas than in cities that The political reasons for the move toward com-
allow free entry, because the number of medallions petition are interesting. As the number of medal-
limits the supply of taxis. For example, in Washington, lions increases, the value of medallions will fall.
D.C., it is quite easy to enter the market, and fares Owners of medallions often form a powerful inter-
are low, often half as high as they are in cities with est group, strenuously objecting to increasing the
quotas. number of medallions. However, there are also
There are usually active markets that enable the strong interests in favor of entry. People with low
owner of a medallion to sell it to other prospective incomes frequently use taxi service, and they are
drivers. If you want to operate a taxi in a market with strongly in favor of the program to increase compe-
a quota, you must buy or rent an existing medallion tition. Politicians understand that customers of taxi
from someone who has one. Because the quotas sup- service will benefit from lower fares, and these taxi
port the price above the equilibrium level, the medal- customers are voters. In the end, in Chicago the vot-
lions can be quite valuable. For example, in New York ers carried the day, initiating the move toward more
City the average price for a taxi medallion was competition.
$766,000 in August 2009. 13 One might ask why Chicago did not deregulate
When medallions can be sold, a more efficient taxis all at once by simply eliminating the need for
supplier will be willing to pay more for a medallion medallions. Out of fairness to existing holders of
than a less efficient supplier. The suppliers of taxi ser- medallions, the government phased in increased
vice are likely to be those with the lowest costs. This entry over time. Anyone who bought a medallion just
suggests that the deadweight loss from the quota sys- before the program of increased entry was announced
tem will be at the lower end of the theoretically pos- paid a handsome price for it. By phasing in the pro-
sible range (e.g., if the supply and demand curves are gram over a number of years, the program allowed
similar to those in Figure 10.12, the deadweight loss existing holders to recover much of their investment
should be close to the sum of areas B C ). in medallions.

13 “Driver Competition Hot as NYC Taxi Medallions Hit $766,000,” USA Today (August 7, 2009).