Sunday, July 5, 2009

More on Larry Summers' Hero, Milton Friedman

Matt Yglesias who, via Felix Salmon, quotes to a study about the negative externalities of vehicular traffic, which found "that driving a car into Manhattan on a weekday causes about $160 of negative externalities to everybody else."

This, of course, made me think of Larry Summers' hero, Milton Friedman. For him, one of the key examples of egregious abuse of governments anywhere was found in how much it cost to get a taxi license in New York City. The only reason for this, Friedman wrote, was sheer corruption. The licenses were worth more if there was a limited number.

If we priced based on negative externalities alone, however, the price would come to $50,000+/year...

Here's the NYC Taxi and limousine commission. Although they do require what are no doubt some lame classes, a drug test, and some various registration fees, it does not look to be terribly expensive:

Update: Commenter Justin Dangel has more perseverance than I: medallions for Taxis still cost around $575,000. This means that roughly they are priced correctly, though still a bit on the cheap side (assuming 6% discount in perpetuity they should be more like $800,000...)... My laziness aside, the point stands -- unless we are at the point where there are so few taxis in NYC it is hard to get one. That hasn't been my experience, but I haven't been to NYC recently. And although I travel extensively, I can't remember the last time I had trouble flagging down a cab in a large city...

Update II: I found my Friedman pamphlet! So let's quote from the master himself: "One common explanation of why government is the problem... is the influence of special interests. A dramatic example ... when I was talking to a taxicab driver in New York City... the number of taxicabs is limited by government fiat... the medallion signifying permission to operate a taxicab ... costs somewhere between $100,000 and $125,000." (This was back in the day of course...)

Friedman then confidently states: "If the limitation on the number of taxis were removed, the benefits would greatly exceed the losses." Friedman apparently thought not at all about the cost of increased traffic. To him the only costs are those absorbed by those who already own medallions. But the widely dispersed costs to other drivers are about $50,000/year per taxi. And this is just a point estimate based on what traffic is like now. If there were no limit on taxis in NYC, traffic would be way, way worse than it already is, and the marginal costs could be higher (or lower, for that matter, but even in this case the total costs would be much higher). Everyone would be worse off. Friedman is correct about something though: "The phenomenon of concentrated benefits and dispersed costs is a valid explanation for many governmental problems." In this case though, there should be taxes and limitations on all cars in NYC, and, if anything, cabs should be taxed more cheaply than normal cars, since taxis are a substitute for people driving. The phenomenon of dispersed costs not born by drivers is the argument for government intervention.

Milton Friedman was profoundly wrong. And in a way which strikes at the heart of his theology.


  1. Taxi Medaillions, which Freidman was talking about, cost $575,000. I agree with the premise of this blog but that post is factually in correct.

  2. Actually the traffic will go down because the fare will be much cheaper,and the availability of the rides much more frequent ,that driving to work,or to move around town in your own car will not make economic sense(when you add the gas + parking fee+time lost finding a parking+ the potential ticket when the meter expires + sometimes the towing of the car)..and you'll have the same freedom of movement with all the available cabs around.In Chicago it's cheaper for 4 people to take a cab for a 4 miles trip than taking the buss or any public transportation !!!!