The D.C. Taxi Hobgoblin and Government "Solution" to a "Non-Problem": Create a D.C. Taxicab Cartel

In the 1920s, H.L. Mencken said "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."   

Exhibit A:

Taxicabs in Washington, D.C. are plentiful (estimated to number as high as 10,000), accessible and easy to find almost any time or day, and with fares cheaper by 20-25% than regulated, limited entry markets ("cartels") like NYC and Boston by 20-25%.  From my personal experience, most D.C. taxi drivers are owner-operators who enjoy working for themselves and being able to set their own hours.  As a group, the drivers are always friendly and courteous towards consumers.  In other words, it's a fairly consumer-driven, market-based  industry with affordable fares and great service, and both the D.C. taxi drivers and D.C. customers seem to be perfectly happy with the current system.

So what's the problem?  There really is no problem, unless apparently you're an over-zealous, anti-market, meddling bureaucrat, and/or a large, anti-competitive taxi company with a self-interest in controlling a large share of a restricted market with high barriers to entry.  In that case, the government "solution" to D.C.'s "non-problem" with its taxicab industry is to create a "taxi cartel," by artificially restricting the number of DC taxicabs to only 4,000 (putting thousands of taxi drivers out of work), and charging a $10,000 cartel membership fee of $10,000 to purchase a special license called a "medallion."

It's pretty easy to predict what will happen with a DC taxi cartel: There will be fewer cabs, the taxi fares will be higher, it will more difficult to get a cab during peak demand, and customer satisfaction will deteriorate.

And what will happen to D.C. medallion prices over time?  We can look to NYC to get an idea.  When NYC capped the number of taxis at about 12,000 in the 1930s, the first medallions sold for only $10 (about $157 in today's dollars), and medallions for individuals are now selling for $673,000 as of June 2011, an all-time record high (see chart above).  That's an annual return of 12.65% for owning NYC taxi medallions, more than double the 5.9% annual return for the Dow Jones Industrial Average over that same period, clearly demonstrating that "cartel membership has its privileges."