From scarcity to abundance: growing the overall pie

Posted by Sophie Schmidt

In 1937, the New York City Board of Alderman handed out its first 16,900 taxi medallions for $10 a pop ($167 at today’s prices). Given the effects of the Great Depression that number soon fell to 11,787. And there it stayed for the next several decades — even though a million more people came to live in New York during that time — before nudging up above 13,000 in the 1990s.

Look around the world and you will see a similar pattern. Paris capped the number of medallions at 14,000 in 1937, and today there are just 15,900 in operation — an increase of less than 14 percent. In 1934, Boston limited the number of licenses to 1,525. It would take 60 years and a decade-long legal battle to push the city to auction off a few hundred more. All this despite the fact that cities were growing richer and bigger. Average household income in the United States, for example, when adjusted for inflation increased threefold during the twentieth century.

So why the strict limitations on the numbers of taxis? Because medallion owners quickly realized the value of these licenses and lobbied hard to keep numbers low. It was the economics of scarcity: make a good or service scarce enough and as demand grows, prices will rise as will the value of the asset.

At their peak New York medallions sold for $1.3 million apiece — today, despite competition from limo companies and private-hire vehicles, the asking price of a license (just one license) is still the same as a two-bedroom apartment on the Upper East Side. And that’s after years of medallion owners making above-market returns (an average of 16 percent each year in the decade to 2014) on their investment, not even considering any profit made from renting the medallion.

While artificially constraining the number of taxi licenses benefitted medallion owners it was generally bad for everyone else. Companies bought up over 60 percent of the medallions in New York — renting them out (along with a cab) to drivers. Those drivers needed to make over $100 in fares every day just to pay the “rent.” And by limiting the number of licenses, cities limited the number of people who had the chance to work as drivers too.

Scarcity also meant high prices for passengers, since there was no competitive pressure to reduce them, as well as a lack of cabs during peak times — after a game or when it was raining. Remember the joys of “up streaming”, with everyone going farther and farther up the street to grab that elusive cab? And in the outer boroughs it was hard to get a ride at all, because taxi drivers stayed in the wealthiest neighborhoods where it was easiest to find passengers.

Fast forward to today. New technology combined with common-sense regulatory reform has made it possible for people to push a button and get a safe, affordable ride across town day or night. This in turn has created new opportunities for people to earn money as drivers. What’s interesting is that rather than simply displacing taxi, apps like Uber appear to be growing the overall transportation pie. It’s not a zero-sum game.

This is most likely because ridesharing has attracted a whole new group of passengers, people who rarely used taxis and drove themselves instead. In Los Angeles, for example, the for-hire vehicle market (which includes taxis, private cars and ridesharing) grew by nearly 400 percent in Uber’s first three years. Of course LA is well known for its basic public transit and limited number of taxis (which are restricted to certain zones), so it may be something of a special case. But according to Portland’s own regulator, the total number of taxi and ridesharing trips in the city grew by more than 40 percent in the first three months after Uber and Lyft’s arrival.

Apps like Uber have had a particular impact in the more remote, less well-off parts of town where easy, affordable, safe transport options have traditionally been limited to non-existent. In New York City, for example, roughly a third of Uber’s rides start in the outer boroughs. Taxis, by contrast, start just 14 percent of trips outside Manhattan. In fact Uber’s highest growth in New York has been in the outer boroughs.

In city after city, we’re seeing that ridesharing is tapping into the demand for a convenient, affordable alternative to driving. And that’s because it’s quicker and less stressful to push a button and get a ride than to get your keys, walk to your car, look up the directions and find a parking space. In the evenings there’s the added factor of alcohol. One study of several Californian cities by Temple University concluded that there was a strong correlation between Uber’s arrival and a five percent drop in alcohol-related driving deaths. Talk about a positive externality.

There’s no doubt increased competition — from ridesharing, new types of taxis (like New York City’s “green” outer borough cabs), and elsewhere — has had an impact on the value of existing taxi medallions just as liberalization in the airline industry initially impacted established carriers. But that value only existed because the number of medallions was artificially restricted, not earned through improvements in service, increased productivity or innovation.

And that loss is in many ways offset by the fact that taxis continue to have the exclusive right to pick up passengers who hail a cab on the street in most cities around the world. Street hail is, by a wide margin, the most popular way for passengers in wealthy, densely populated parts of town (like city centers and business districts) to get around. This effectively guarantees taxis a steady flow of high-priced, high-volume trips for the foreseeable future. What’s more, competition from ridesharing is leading taxis to improve their service and experiment with new technology themselves — creating a better experience for riders as well.

It’s not a bad foundation for success — especially since the evidence suggests that moving from a world of scarcity to abundance may help grow the pie for everyone.