Late last month, Peter Van Doren of the Cato Institute considered the question of whether the owners of taxi medallions should be compensated when the value of their asset declines due to the advent of new competition:
The medallions have value because the supply of rights to operate taxis, restricted by city regulation, is low relative to demand. The Post article presents data on the number of taxis per 100,000 residents. Washington D. C. licenses cabs, but does not restrict the number of cabs operating through a medallion requirement, and has almost 900 taxis per 100,000 residents. In contrast, Chicago and New York, which have medallion restrictions, only have approximately 230 to 250 taxis per 100,000 residents. The supply restrictions in Chicago and New York lead to excess profits, which reveal themselves in the bids for medallions in the secondary market. The present value of the profits from owning the “rights to cruise for passengers” relative to the profits of other investments is the market value of the medallions, which until recently ranged from $500,000 to a million dollars depending on the city and the severity of the medallion restrictions.
But what happens when supply restrictions are effectively circumvented by, for example, new entrants like Uber that offer taxi-like service, yet which have avoided classification as taxis for a variety of reasons? Medallion supply restrictions are effectively mooted, and the value of medallions declines. This raises the question of whether regulatory regimes that permit Uber-like technological innovations to undermine supply restrictions represent, in effect, a “taking” by the government that merits compensation. Van Doren dismisses this idea, drawing on research he conducted in the 1990s. Van Doren and his co-author, Richard Sansing, actually analyzed New York city’s taxi medallion market:
We analyzed data on lease versus purchase of tax medallions in New York City. If there were no risk, the purchase price of a medallion would reflect the present value of leasing in perpetuity. Unlike other assets the medallion’s only value is the entry restrictions created by government. At the time we conducted our analysis the present value of leasing in perpetuity at 5 percent interest was $240,000 whereas the sale price of medallions was only $100,000. That is the purchase price of a medallion at that time amortized the cash flows over a period of 20 years as if they would go to zero in year 21. Unlike other investments the only reason that cash flows might go to zero was the possibility of deregulation or reduction in enforcement of the entry restrictions. If policy change created any reduction in cash flows in years one through 19 investors made less than normal profits. Investors made “excess” profits if any reduction in cash flow occurred after year 20. Thus the medallion market was like a fairly priced lottery ticket that took into account the possibility of deregulation, even though at the time we did this calculation no change in taxi regulation had ever taken place since it was instituted in the late 1930s. We concluded that no compensation was required to preserve equity or fairness because the price for medallions reflected the risk investors faced from policy change.
Moreover, Van Doren and Sansing argue that the risk of taxi medallion deregulation that faces the owners of taxi medallions can be managed through asset diversification.
Yet in a recent EconTalk interview with Russ Roberts, Michael Munger of Duke University offered a thought-provoking objection: while Van Doren and Sansing may well be right that the property right that is a taxi medallion is a contingent property right, and that investors must take into account regulatory risk, much the same can be said of all property rights. If the circumvention of taxi supply restrictions goes uncompensated, Munger suggests that Van Doren and Sansing’s rationale could apply to other modes of expropriation as well (“well, the price of buying this piece of land took into account the risk that your land would eventually be nationalized”). I tend to be more sympathetic to Van Doren’s argument, which Munger himself ultimately accepts, but Munger raises a possibility that sounds entirely plausible.
There is, however, another wrinkle. While one could argue that Uber is doing little more than circumventing taxi supply restrictions, others believe that Uber is offering a meaningfully different service that does more than just increase the supply of taxis. Rather, as Neil Irwin reminds us, it aims to “reinvent the way people get around” by, among other things, reducing the need for private automobile ownership. If Uber and services like it lead to a more efficient allocation of transportation resources broadly understood, perhaps compensating medallion owners is (in the long-run) a small price to pay.