by Mario Rizzo
Some time ago I was accused by the noted economist and psychiatrist Professor Bradford DeLong of being a “psychopath” and “clinically crazy” because I suggested that people should not tip cab drivers in New York City. I do not intend to revisit that particular issue here.
This time I would like to take on the Taxi and Limousine Commission’s approval of a 17% fare increase for cab rides beginning in September. The ostensible purpose of this is to help taxi drivers make a decent living. Part of the case for this has been made by showing that the prices of all sorts of food items have increased over the past several years. (Interestingly, the price of agricultural products is not considered part of core inflation, as Fed Chair Ben Bernanke tells us. But no matter.)
The problem with this argument is that the income (wages) of taxi drivers is, or should be (more on that later), determined on a competitive market. So that if the market determines that the price of driving services should rise, the medallion owners will have to cough up more money by reducing the rental charges on the cab.
Now please look above at the increase in the value of NYC taxi medallions over the past 40 years. What an amazing ride upwards! Thus by insulating the medallion owners against the need to lower their rental rates, the Taxi and Limo Commission ensures that the ride upwards continues.
However, the Commission realizes that if they simply approved the rate increase and if the market does not warrant an increase in drivers’ compensation, the medallion owners would simply raise their rental rates. So in its Wisdom the Commission also approved a cap on the rental rates.
So where are we? Instead of the market setting the taxi fare the Commission will do it. If they set it at higher than the equilibrium rate, then potential drivers will be kept out of the industry (and others may drop out). In any event, it is the wrong way to go.
Let the medallion owners reduce their rental rates, if necessary, to restore the market compensation rate for drivers. Let the value of the medallions fall — they can go a long way down.
In the meanwhile, try not to tip so much.