Last October I was riding in the back of a taxi in Chicago. I asked the driver about the price he paid for his taxi medallion. (A taxi medallion is the license that allows drivers to operate a taxi.) He said he didn’t know because he was driving for a company that owned the medallion. So, I picked up a Wall Street Journal the next day and… there was an article about alternative investments, one of which is taxi medallions.
So, you might be wondering, who owns taxi medallions? Medallions are owned either by folks wanting to drive a taxi or by investors who can lease these medallions to management companies or fleet garages, which in turn lease these medallions to drivers. The number of medallions is generally fixed in a city. For example, the WSJ article said that New York City had 13,237 medallions as of October 2012, while Chicago had 7,000 medallions.[1]
The WSJ article had some interesting analyses done by its staff. For example, based on data from New York City’s Taxi and Limousine Commission, since 1980, medallion prices have appreciated on an annualized and inflation-adjusted basis by 6.8%. In Chicago, the change in prices is even more dramatic. Between 2001 and 2006, medallion prices in Chicago were in the upper $40,000 range. Since then, prices have increased, reaching a high of $325,750 in 2012. That is approximately an 800% increase in the last 6 years. It’s no wonder why investors, such as Medallion Financial, purchase medallions in cities across the country and allow investors to buy shares.
From an economics perspective, the increase in taxi medallion prices is simply explained by a fixed (inelastic) supply of medallions in a given city and increasing demand over time. The graph below shows an inelastic supply of medallions and increased demand over time in Chicago.
– Clifford Lipscomb
Image by Ryan McGuire from Pixabay
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