KW_Macro_Ch_04_Sec_03_Conrolling_Quantities

KW_Macro_Ch_04_Sec_03_Conrolling_Quantities - chapter 4 >...

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>> The Market Strikes Back Section 3: Controlling Quantities chapter 4 In the 1930s, New York City instituted a system of licensing for taxicabs: only taxis with a “medallion” were allowed to pick up passengers. Because this system was intended to assure quality, medallion owners were supposed to maintain certain standards, including safety and cleanliness. A total of 11,787 medallions were issued, with taxi owners paying $10 for each medallion. In 1995, there were still only 11,787 licensed taxicabs in New York, even though the city had meanwhile become the financial capital of the world, a place where hundreds of thousands of people in a hurry tried to hail a cab every day. (An additional 400 medallions were issued in 1995, and in 2003 plans were announced to issue 900 more.) The result of this restriction on the number of taxis was that those medallions became very valuable: if you wanted to operate a New York taxi, you had to lease a medallion from someone else or buy one for a going price of about $250,000. It turns out that the New York story is not unique; other cities introduced similar medallion systems in the 1930s and, like New York, have issued few new medallions since. In San Francisco and Boston, as in New York, taxi medallions trade for six- figure prices.
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A taxi medallion system is a form of quantity control , or quota , by which the government regulates the quantity of a good that can be bought or sold rather than the price at which it is transacted. The total amount of the good that can be trans- acted under the quantity control is called the quota limit . Typically, the government limits quantity in a market by issuing licenses; only people with a license can legal- ly supply the good. A taxi medallion is just such a license. The government of New York City limits the number of taxi rides that can be sold by limiting the number of taxis to only those who hold medallions. There are many other cases of quantity con- trols, ranging from limits on how much foreign currency (for instance, British pounds or Mexican pesos) people are allowed to buy to the quantity of clams New Jersey fishing boats are allowed to catch. Notice, by the way, that although there are price controls on both sides of the equilibrium price—price ceilings and price floors— in the real world, quantity controls always set an upper, not a lower, limit on quan- tities. After all, nobody can be forced to buy or sell more than they want to! Some of these attempts to control quantities are undertaken for good economic reasons, some for bad ones. In many cases, as we will see, quantity controls intro- duced to address a temporary problem become politically hard to remove later because the beneficiaries don’t want them abolished, even after the original reason for their existence is long gone. But whatever the reasons for such controls, they have certain predictable—and usually undesirable—economic consequences.
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KW_Macro_Ch_04_Sec_03_Conrolling_Quantities - chapter 4 >...

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