What is Land (cont) – Taxi
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The taxi medallion is another form of “Land”. It is a good example of what Land is and it is easy to demonstrate some of the market failures.
I am not sure as to why they started issuing such medallions, little monopolies, but I believe there are two reasons. The first is it had something to do with altruism. Generally speaking, regulations come from a good heart but a soft brain. The second is, people in power actually understand how the power of rent works, realizing it would be an easy sell to the people, and moved forward it in an effort to enrich their friends. I don’t know which the truth is. All I know is it gives me a great example to work with.
In New York City, the number of cabs is limited to 11,787. Each cab needs to have a medallion attached to its hood. Occasionally the TLC auctions off new ones, but this has not happened in around 50 years. These medallions are, however, freely tradable.
Further, the TLC sets the price of the cab and what it can charge for each situation. I’m not going to go into if this price fixing is a good thing or a bad thing, because anyone who has traveled in Egypt or Saudi Arabia knows, having a predetermined and set price for a cab can be a very good thing.
Let’s model this simply first.
Consider any other “unskilled” job and how much I could earn. In this simple world lets say it is 100 dollars per year.
Now, I have been given this medallion by Warren Buffet and Bill Gates because they are into that kind of thing. It so turns out that I can drive a cab and after all my expenses are made (car, gas, repair, etc) I earn 200 dollars per year. Sounds good, right?
Joe down the street hates his job. He earns 100 dollars a year. They are both “unskilled” labor and he says to you he might be willing to buy this medallion from you, or maybe you could rent it to him?
So, how much should you rent it for is the first question. That is easy. Rent is your opportunity cost and in this case, that is 100 dollars. I can sit on my but and do nothing and earn 100 dollars a year for doing nothing, or I can drive myself and earn 200, or I can rent for 100 dollars and get some other job for 100 dollars. Which one you choose depends on which scenario is worth more then 100 to you.
Ok, but Joe is really interested in buying so how much should you sell this medallion for?
All you need to do is teach yourself a little bit of present value, which is nothing but fractions added up. For you math geeks, here ya go:
(sorry, i couldn't copy over the equation editor formula, just trust me in the next few lines where it goes in "the limit".)
It so turns out the limiting equation for that is simply R/I or in other words, Rent divided by interest, which is all you need to know.
Ok, so lets say I can loan out that money to anyone I want to at the prevailing interest rate of .10 or ten percent and like we said earlier the rent is 100 per period. So, the present value of this medallion is 1000 dollars. Let’s say the interest rate is 5% or .05, it would then be worth 2000 dollars. Why? Because, I have a guaranteed 100 dollar rental income from this land / medallion and I will not be willing to give it up for anything less then a 100 dollar stream of payments. In this case, that is 2000 dollars. The interest paid on this 2000 dollars is 100 dollars, so you are happy.
Ok, so that is all good. You decide to sell your medallion for 2000 dollars and invest your money wisely in other medallions (lets say you take out a loan to get ten more).
Ok, so a new product comes along, let’s say a new hybrid that will suddenly make driving the cab less costly. Now, if you own a medallion and drive yourself rather then rent you take home 250 a year after all expanses are made, all other jobs are still 100 dollars a year.
So, I have a bunch of medallions and I have a bunch of cabs needing drivers. What do I do? The old rental rate was 100 dollars for driving a cab. Lots of people want to drive a cab and they are willing to do it at 100 dollars. I decide to raise the rents for the medallion and I will now charge them 110. They make a little more and I make a little more. But, I am getting job offers from Sam for a rent of 120, and Todd for 130, and Pete for 140 and Joe wants his old driving position back at 150. Do I pass those cost savings on? Well, I did, briefly, and then the free-market labor market sort of competed them away, woops, nothing I can do about that I’m just the rent taking land lord.
Let’s say the city in all of its benevolence wants to give the “cabbies a break” and raises the rates which they can charge… would you like to guess what happens to the rental rate of that medallion? You guessed it; it goes up until it meets the prevailing wage, enriching the land lord. Just kind of makes you feel al warm and fuzzy every time you get in a cab it is going to end up right back at Carnegie Hill.
Would you like to take a guess what happens if a group of people are willing to work less then the prevailing wage? You get one beer in NYC the next time we both are there at the same if you can answer correctly.
The taxi medallion is another form of “Land”. It is a good example of what Land is and it is easy to demonstrate some of the market failures.
I am not sure as to why they started issuing such medallions, little monopolies, but I believe there are two reasons. The first is it had something to do with altruism. Generally speaking, regulations come from a good heart but a soft brain. The second is, people in power actually understand how the power of rent works, realizing it would be an easy sell to the people, and moved forward it in an effort to enrich their friends. I don’t know which the truth is. All I know is it gives me a great example to work with.
In New York City, the number of cabs is limited to 11,787. Each cab needs to have a medallion attached to its hood. Occasionally the TLC auctions off new ones, but this has not happened in around 50 years. These medallions are, however, freely tradable.
Further, the TLC sets the price of the cab and what it can charge for each situation. I’m not going to go into if this price fixing is a good thing or a bad thing, because anyone who has traveled in Egypt or Saudi Arabia knows, having a predetermined and set price for a cab can be a very good thing.
Let’s model this simply first.
Consider any other “unskilled” job and how much I could earn. In this simple world lets say it is 100 dollars per year.
Now, I have been given this medallion by Warren Buffet and Bill Gates because they are into that kind of thing. It so turns out that I can drive a cab and after all my expenses are made (car, gas, repair, etc) I earn 200 dollars per year. Sounds good, right?
Joe down the street hates his job. He earns 100 dollars a year. They are both “unskilled” labor and he says to you he might be willing to buy this medallion from you, or maybe you could rent it to him?
So, how much should you rent it for is the first question. That is easy. Rent is your opportunity cost and in this case, that is 100 dollars. I can sit on my but and do nothing and earn 100 dollars a year for doing nothing, or I can drive myself and earn 200, or I can rent for 100 dollars and get some other job for 100 dollars. Which one you choose depends on which scenario is worth more then 100 to you.
Ok, but Joe is really interested in buying so how much should you sell this medallion for?
All you need to do is teach yourself a little bit of present value, which is nothing but fractions added up. For you math geeks, here ya go:
(sorry, i couldn't copy over the equation editor formula, just trust me in the next few lines where it goes in "the limit".)
It so turns out the limiting equation for that is simply R/I or in other words, Rent divided by interest, which is all you need to know.
Ok, so lets say I can loan out that money to anyone I want to at the prevailing interest rate of .10 or ten percent and like we said earlier the rent is 100 per period. So, the present value of this medallion is 1000 dollars. Let’s say the interest rate is 5% or .05, it would then be worth 2000 dollars. Why? Because, I have a guaranteed 100 dollar rental income from this land / medallion and I will not be willing to give it up for anything less then a 100 dollar stream of payments. In this case, that is 2000 dollars. The interest paid on this 2000 dollars is 100 dollars, so you are happy.
Ok, so that is all good. You decide to sell your medallion for 2000 dollars and invest your money wisely in other medallions (lets say you take out a loan to get ten more).
Ok, so a new product comes along, let’s say a new hybrid that will suddenly make driving the cab less costly. Now, if you own a medallion and drive yourself rather then rent you take home 250 a year after all expanses are made, all other jobs are still 100 dollars a year.
So, I have a bunch of medallions and I have a bunch of cabs needing drivers. What do I do? The old rental rate was 100 dollars for driving a cab. Lots of people want to drive a cab and they are willing to do it at 100 dollars. I decide to raise the rents for the medallion and I will now charge them 110. They make a little more and I make a little more. But, I am getting job offers from Sam for a rent of 120, and Todd for 130, and Pete for 140 and Joe wants his old driving position back at 150. Do I pass those cost savings on? Well, I did, briefly, and then the free-market labor market sort of competed them away, woops, nothing I can do about that I’m just the rent taking land lord.
Let’s say the city in all of its benevolence wants to give the “cabbies a break” and raises the rates which they can charge… would you like to guess what happens to the rental rate of that medallion? You guessed it; it goes up until it meets the prevailing wage, enriching the land lord. Just kind of makes you feel al warm and fuzzy every time you get in a cab it is going to end up right back at Carnegie Hill.
Would you like to take a guess what happens if a group of people are willing to work less then the prevailing wage? You get one beer in NYC the next time we both are there at the same if you can answer correctly.
-eire1130 4:55 PM
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