Sunday, June 10, 2007

Economics of New York City

I've just returned from a little vacation to New York City to visit my brother. If you've ever visited the city, you'll know that prices of most goods and services are a bit higher than what you'd pay in Marietta. You'd also be amazed at the variety of markets that cater to every possible consumer preference. While we have yet to develop a formal theory of prices (that's part II of the course), the notion of relative scarcity can go a long way to explain the high prices.

This article describes the economics of operating a variety of businesses in NYC. One industry that surpises a lot of people is the taxi cab market. You'd think it would be pretty easy to get into the business...after all, all you need is a car, right? Wrong. The number of taxi cabs is artificially limited by the city government to around 13,000. Each cab owner must possess a license (called a medallion) to operate the cab. Given the restriction on the number available, the market price of a medallion hovers around $240,000. How's that for an entry barrier?

By the way, why do you suppose the city government artificially limits the number of medallions? Why not simply open the city up to free and unfettered competition?

While in NYC, I also ate $4 hot dogs at Yankee Stadium, got propositioned by a hooker while looking for a cab with my wife and daughter, and stood three feet away from someone called Rihanna while she signed her latest CD for my daughter (pictured in the foreground looking to her right in the previous photo).

4 comments:

Heather Paige said...

I believe that the city would limit the number of medallions to A.) Increase the quality of taxi cab drivers, and B.) reduce the congestion of taxi cabs on the busy city streets. The taxi cab market must have been becoming inefficient in order for the government to step in and make these limits ("When markets don’t achieve
efficiency, government intervention
can improve society’s welfare").

Krista the VISTA said...

It really costs $240,000 to receive a medallion for a taxi in New York? WOW.
The first thing that came to my mind was that the government is most likely trying to cut down traffic in the city. The city would be inefficiently run if people were not able to effectively make it from one place to another at a speed faster than walking. As we've learned, government is able to interfere with a society if they know a way to make it more efficient, and I think this is a perfect example of that theory.

Tian said...

I totally agree that prices of most goods and services are higher in NYC than those in other cities. I am currently working in NYC and a $15 lunch is a very good deal. Considering convenience, I live on Fulton Street, which is two blocks away from the World Trade Center and four blocks away from the Wall Street. The rent is extremely high. With the same amount of money, I can live in Marietta for the entire year. As far as I know, a lot of students from all over the country come to NYC for summer internships and other activities so that the demand of summer housing is huge. However, there is very limited housing available in NYC, especially in downtown area. Hence, demand surpasses supply, which leads to a shortage in summer housing in NYC. In order to get into the limited rooms, people need to pay more rent.
About the city cab medallions, I think it has something to do with the horrible traffic. Subway is a very convenient public transportation because the traffic jam in NYC makes the city a huge parking lot during rush hours. I think by limiting the number of medallions, the government is trying to control the city traffic and pollutions.
By the way, NYC is an amazing city. I got a last-minute ticket for only $20 (suppose to be $95) for a Broadway show “Rent”. There are many free park opera and concerts in the summer as well. You will never get bored living in NYC.
~Tian

Unknown said...

I would think that the government regulates the economy to keep the traffic down, keeping the property taxes higher and the air cleaner. Also, if anyone could get into the business, then prices could drop to the point that cabbies weren't making enough money to live.