New York City licenses taxicabs in two classes: (1) for operation by companies with fleets and (2) for operation by independent driver-owners having only one cab. Strict limits are imposed on the number of taxicabs by restricting the number of licenses, or medallions, that are issued to provide service on the streets of New York City. This medallion system dates from a Depression-era city law designed to address an overabundance of taxis that depressed driver earnings and congested city streets. In 1937, the city slapped a moratorium on the issuance of new taxicab licenses. The number of cabs, which peaked at 21,000 in 1931, fell from 13,500 in 1937 to 11,787 in May 1996, when the city broke a 59-year cap and issued an additional 400 licenses. However, because the city has failed to allow sufficient expansion, taxicab medallions have developed a trading value in the open market. After decades of often-explosive medallion price increases, fleet license prices rose to $600,000 in 2007.
A. Discuss the factors determining the value of a license. To make your answer concrete, estimate numerical values for the various components that together can be summarized in a medallion price of $600,000.
B. What factors would determine whether a change in the fare fixed by the city would raise or lower the value of a medallion?
C. Cab drivers, whether hired by companies or as owners of their own cabs, seem unanimous in opposing any increase in the number of cabs licensed. They argue that an increase in the number of cabs would increase competition for customers and drive down what they regard as an already unduly low return to drivers. Is their economic analysis correct? Who would gain and who would lose from an expansion in the number of licenses issued at a nominal fee?