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A cab medallion system in D.C.? The neighborhoods will pay the price

Is the District looking for ways to cut service and increase costs for residents and businesses? That’s what will happen, at least, if the D.C. Council adopts a proposed ordinance that would institute a taxi medallion system in the city and could cut the number of taxis serving the public in half.

There goes the neighborhood — literally — as taxi drivers inevitably would abandon low-margin trips in outer neighborhoods such as Anacostia to concentrate on the milk runs to the airport or serve higher-income customers along K Street and Capitol Hill.

That conclusion may seem exaggerated, but other cities that have restricted taxicab availability have had that kind of result. It’s simple economics. Drivers focus on fares that generate the highest return, and their ability to do so will increase as competition becomes more limited.

Medallions are metal plates issued to vehicles authorized to operate as taxis. Medallions have been around for decades in some cities and were widely adopted during the 1930s as an attempt to limit competition from new cab companies.

The big winners in a medallion system are large existing companies. Once medallion systems are put in place and the supply is restricted, as the D.C. ordinance explicitly aims to do, the price of medallions goes through the roof. In New York, medallions sell for upward of $600,000. The going price in Boston is $400,000. Even in small taxi markets such as Columbus, Ohio and Minneapolis, taxi medallions and licenses have sold for more than $25,000.

The average wage for a taxi driver in the D.C. metropolitan area hovers around $32,000 per year, and a medallion system would quickly squeeze out the little guy. These workers can have trouble making ends meet as it is, and start-up entrepreneurs are easily overwhelmed by the challenge of getting the hundreds of thousands of dollars needed just to buy a plate giving them permission to drive. As a result, medallions essentially relegate drivers to working for a big cab company. Rather than funnel revenue into buying (or upgrading) their vehicles, these drivers shell out thousands of dollars each year in leases to medallion owners.

Meanwhile, the big cab companies lock in their dominant position by borrowing to buy up more medallions, making it virtually impossible for a company to start from scratch. Indeed, the initial deal proposed in the District’s ordinance is pretty sweet. If you’re a company that has been around for 30 years or more, you will have to pay an initial price of $500 for an unrestricted medallion. If you’re a company younger than 20, the cost will be $5,000.

That creates some fast revenue for the city, but the real benefit would accrue to the cab companies after the initial sale because the ordinance creates an instant shortage by limiting the number of medallions to 4,000 (in a city with 10,672 licensed cabdrivers and 116 licensed companies). This virtually guarantees a black market for medallions and huge increases in price.

The biggest losers in this system, however, are likely to be outer neighborhoods such as lower-income sections of Southeast and Northeast. With substantially fewer taxis available to meet demand, drivers will pick the most lucrative routes.

That’s what’s happened in other cities with medallion systems. Boston’s Hackney Division estimates that 70 percent of its taxis provide service to downtown or the airport, leaving just 30 percent of the fleet to work neighborhoods that make up 86 percent of the city.

The most likely outcome for the District’s lower-income neighborhoods is the emergence of a thriving, if dysfunctional, black market for cab services. While these so-called “gypsy” cabs fill a legitimate demand for transportation, their inability to use the formal legal and regulatory system to enforce contracts and performance standards puts both customers and drivers at risk.

The medallion system combined with a cap on taxis practically guarantees reduced service, higher costs and less innovation in the District’s taxi market. Everyone will suffer except the big cab companies. A far better approach would be to scrap the medallion proposal all together and focus on maintaining what is one of the most entrepreneurial taxi markets in the nation.

The writer is director of urban growth and land-use policy at the Reason Foundation.

 
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