Market Disruption

…is what happens in a free market, and one result is wealth redistribution, not by inefficient, politically motivated government mandate, but morally and efficiently by voluntary exchange among market participants—folks like you and me. One example of this is the price of taxi medallions.

…leading cabbies and fleet owners throughout the USA worried that their industry will be decimated if local and state government doesn’t intervene.

In Chicago, which has the country’s second biggest fleet with roughly 7,000 taxis, the median sale price for a medallion hovered around $70,000 in 2007 before reaching a median sales peak of $357,000 in late 2013.

Since reaching that high point more than a year ago, the value of medallions in the Windy City have sharply declined and sales have ground to a near halt—with the city recording only seven medallion transfers in the first quarter of 2015….

(Aside: can you see the bubble in that?)

Now cabbies and fleet owners are worried about the prices of their medallions and want government to “intervene.”

Cabbies around the country complain that drivers for services like Uber, which use a smartphone app to connect riders with freelancers using their own vehicles, are disrupting the market and playing with an unfair advantage.

Not so much of an unfair advantage. Nothing is stopping the “official” cabbies from using the same sort of smartphone application to achieve the same thing: on demand, low cost rides for the customer. It’s certainly true that the price of a medallion is tanking (but really: 70 large for a license to drive a car for hire? What supports that sort of pricing other than a government protected monopoly?)

Let’s look at the wealth redistribution of a medallion-for-sale monopoly and an Uber or a Lyft, in which anyone can play for as long or as briefly as they wish.

With the medallions—especially with their cost—cab fleets charge high prices per fraction of a mile on the trip, with government-mandated price floors (in addition to the monopoly aspect, a need presumably driven by the necessity of recovering the cost of the license to operate represented by that medallion). Wealth is transferred from the customer to the cab fleet owner, and the customer gets a ride to his destination. When the cabbie can, or is willing to, get to the customer’s location.

With an Uber-like operation, a customer can make his wish known via his smartphone, and a ride-share participant arrives promptly (because there are a lot more of these than there are formally licensed cabbies), and the customer gets his ride, at a rate commensurate with the area and the demand for rides in the area, but at a significantly lower price than the medallioned cabbie. The wealth redistribution is at that lower rate—competition, you know—and the money transferred goes directly to the driver (minus some Uber overhead, which isn’t much compared to that medallion, just for starters).

The fact of that lower price, and the ubiquitousness of what are essentially part-time and wholly voluntary drivers (who are driving as an additional thing, not as their day job) demonstrates that the fleet cab pricing is excessive relative to the industry needs: the alternative to the formal fleets simply have a much lower cost structure.

That’s a thing to be celebrated, however disruptive it may be to the establishment. Medallion cabbies and buggy whips….

Lots of folks are getting a service they want at a lower price than heretofore, and lots of folks are getting some extra money—lots more folks than the special few who drive medallion-permitted cabs.

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