That supply not enter the market

In response to a few attacks on taxi owners, New Zealand three years ago started requiring that all cabs have cameras and be on 24-hour monitored dispatch.

I expected that this was a move towards cartelization that would have bad effects on consumers. I'd written:

The real cost of the soon-to-be-mandatory taxicab cameras won't be the 30-odd cents it adds to the cost of the typical cab ride. Rather, it's the loss of surplus that will come when the World Cup hits in 2011 and jitney cabs will fail to come into the market because of the increased fixed cost of shifting your private car into taxi service. Right now, best I'm aware, so long as you have a driver's license that permits it, nothing much stops you from slapping a sign onto your car saying "Cab" and charging to run folks around town. We'd expect that to happen during odd spikes in demand.

I figured that this would have most effect around the time of the Rugby World Cup, or other big events that would otherwise bring jitneys into the market. Looks like it's been worse than I expected.

The Herald reprints a piece from The Star:

A lack of taxis in some parts of Christchurch is causing major problems for evening revellers trying to get home safely.

The drop off in taxi numbers is leaving agitated people outside pubs, leading to fights and tempting people to drive home after drinking.

Some taxi drivers are refusing to go to the eastern suburbs because of concern about damaging their vehicles on quake-damaged roads, which is compounding the problem.

New Brighton's Pierside Cafe owner Tony Brooks said since the earthquakes they could not get taxis to take their patrons home.

Security staff, bar managers and DJs were driving patrons home.

"This has been an issue from the moment the earthquake hit - this is not just a little problem, this is a big problem," he said.

"We had Midge Marsden here on Saturday and it was an amazing gig - but it was all soured at the end of the night by the lack of taxis," he said.

Mr Brooks said he had been pre-booking taxis for when the bar closed at 1am but they never turned up.

People were driving home drunk as a result.

Taxi companies say tougher regulations and costly maintenance on vehicles because of damaged roads meant six operators had stopped since the earthquakes.

Blue Star Taxi's general manager Bob Wilkinson said: "Part of the issue is the way the bar scene has split, now the hotspots are in Riccarton, Lincoln Rd and Merivale and The Palms and it is pretty hard to cover all of those areas instead of just the central city before the earthquakes.

"Six taxi companies folded because new regulations mean they had to have 24-7 rosters, cameras in cars, a phone room and this added to the cost of running them."

First Direct's owner Pam Jackman said: "Our drivers don't want to go out to Brighton because of the roads." Ms Jackman said their taxi could do between 1000 and 3000 kilometres a week.

Ferrymead's Speight's Ale House restaurant manager Joseph Poulter said the most frustrating thing was waiting for the taxi companies to answer the phone on a Friday and Saturday.

"We just give up and try another number," he said.

Mr Wilkinson said there were only three major taxi companies left in Christchurch which were covering a city once serviced by more than nine.

You'd normally expect that shortages like this would bring new supply into the market: people who'd charge a fair bit to run cabs from the Brighton bars late in the evening. Pull the kid seats out of the back of the van, slap a sign on the side, and offer fixed-price fares to different parts of town. But not if you also have to run under dispatch and cover the costs of a camera setup.

I wonder whether private-hire vehicles are still exempt from the regulations.

Not an equilibrium

So taxi cab tips are up consequent to a new credit card swipe system that encourages large tips. Cheap Talk and Marginal Revolution have both noticed.

Here's Alex Tabarrok:

Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.

But does this make the drivers better off? Not unless they own the taxi medallion!

Joshua notes that the new charging system started in 2007.

Recall that New York City taxicabs are heavily regulated: the right to run a cab has to be purchased. The medallion giving you the right to run a cab is expensive. The 2004 annual report of the Taxicab and Limousine Commission gives the price history from 1947 to 2004.

They stopped publishing that graph in subsequent years' annual reports, but they do report average sale prices:

• 2005: $350,000 individual, $391,000 corporate
• 2006: $411,000 individual, $525,000 corporate
• 2007: $420,964 individual, $573,489 corporate
• 2008: $550,000 individual, $747,000 corporate
• 2009: $584,000 individual, $775,000 corporate
• 2010: $624,000 individual, $850,000 corporate
• 2011: $699,000 individual, $1,000,000 corporate
• 2012: Average annual prices are not yet available. 

Every year when I teach my public choice class, I look up the taxi medallion price when I lecture on transitional gains traps. And I've been a bit puzzled about why the prices seemed to skyrocket during the 2008 recession and onwards; the top line of the graph above, $350,000, seems pretty low compared to where things are now.

I added red bars at the bottom of the chart above for NBER recessions, although the really poor resolution on the original PDF makes identifying years a bit tough. Note also that the first few years aren't to the same scale as the rest: 1947, 1950, 1952, 1959, 1960, 1962, 1963, then annual ticks thereafter. You can really see the dip from the 1991 and 2001 recessions, though the latter recession's dip started prior to the recession. But the 2007-2009 downturn was surely larger than the prior recessions, and was accompanied by a strong increase in medallion sale prices. This puzzled me until now. The present value of the potential rents increased with the new fare system, so medallion prices went up.

This surely then was accompanied by an erosion in non-tip payments to drivers since the market for driving cabs is competitive, even if the right to run a cab isn't. This is my prediction; I haven't been to New York in a while. Maybe somebody who knows can tell me whether I'm on the right track.