photo by Rogelio Fernandez via Flickr
Evidently, New York City has a taxicab shortage. This fall, two medallions — the license to operate a cab there — sold for $1 million each. That’s because the Taxi and Limousine Commission restricts the number of cabs allowed in the city. Cab numbers were limited in 1937 to 16,900 and fell to 11,787 in the 1940s. Today, there are only 13,237 yellow cabs and those medallion owners are sitting on an investment that’s outpaced the price of gold and the stock market.
Economists hate this system. It has them going on about competition, the invisible hand, market inefficiencies, service shortages, windfall profits, etc. And all these arguments make sense, until you bring physical space into the story. Limiting the city’s taxi fleet is actually a good idea. For Manhattan, anyway. It’s just been limited for too long.
The goal of a taxi system is for any user to be able to always have a free cab at their disposal in all places. The thing is, taxis take up physical space. And when you get too many cabs in Manhattan, you get clogged streets and you may as well walk. So you have to limit the number of cabs. And when you limit the number of cabs, you have to protect consumers from the inflated prices that follow. Besides, if drivers all charged different rates, how much congestion would that cause? People would be perpetually waiting for cheaper cab to hail.
Yellow cabs should be thought of as part of the city’s larger transportation system (and their regulation brought under the city’s Department of Transportation). It’s a transportation system that needs to reduce congestion, expand mass transit, and keep fares affordable. The pent-up need for more taxis could even offer an opportunity. With cab companies signalling that million-dollar taxi medallions are a reasonable investment, the city government should print some money… err allow more taxis. Just figure out what the appropriate number of cabs is for its streets and have some medallion auctions. Then, for a city that’s famously congested, expand transit (perhaps even freeing up the streets for more taxis).
photo by Noel Hidalgo via Flickr
Citiography 
“The thing is, taxis take up physical space. And when you get too many cabs in Manhattan, you get clogged streets and you may as well walk. So you have to limit the number of cabs. …. Besides, if drivers all charged different rates, how much congestion would that cause? People would be perpetually waiting for cheaper cab to hail.”
I think you should think a little more carefully about how taxi systems might regulate themselves. In areas where governments do not regulate fares, your idea that people wait around to wait for a cheaper one may happen, but to imagine that people wait perpetually for the cheapest one is wrong – there is a large cost to waiting, which is the value of our time. Also, people typically do not like to bargain very much in this country as it is not part of our culture anymore. At some point, people buy if they want to go.
And the idea that congestion is the problem from allowing more cabs – if it becomes too congested and walking is faster,people make that choice to walk, and cabbies realize they cannot make a buck, so they refrain from filling the street. This type of thing works itself out. But if you were truly worried about congestion, why not have some sort of congestion pricing on all vehicles in a region? Then you can start pricing the space on the road, which is the scarce item.
I’m an economist, and so I think of these tradeoffs a lot