- Because it's never been done and
- Because Tullock says there is no solution
Tullock in 1976 wrote about the Transitional Gains Trap. Suppose that the government puts in place a regulation that confers rents on a few companies. So each of those companies earns an extra $1 million per year, now and forever. The value of the new rental stream has to be capitalized into the price of the fixed asset that draws the rent. And so New York City taxicab medallions, which give their owners the right to run a vehicle as a taxicab, sell for about $750,000. The link is from the homepage of a firm that provides loans to help folks buy taxicab medallions. And in Canada's ridiculous dairy quota management system, the right to milk a cow costs about $25,000. The value of the rent gets capitalized into the asset that's in fixed supply: the permit to run the cab, the right to milk a cow, the land that's eligible for tobacco growing, and so on.
After that capitalization has taken place, the person benefiting from the rental flow is again earning only a normal rate of return on his investment. All of his gain was transitional: the rent-seeker gets a one-off increase in capital value, but no ongoing benefits. Of course, over time, ownership changes; the new owners never enjoyed the transitional gain and earn only a normal rate of return.
Tullock says that, as consequence, reform is well-neigh impossible. While the folks getting the rent are not made better off by it, getting rid of it would impose massive capital losses on them; they'll then lobby up to the expected value of the capital loss to prevent it. And, he says further that there's no way out of it.
The solution seems remarkably simple in principle; since it's not been done, I must be wrong.
For New York Taxis, the City of New York stumps up to buy out all existing medallion holders at a price equal to the average selling price in the quarter prior to folks started talking about a buy-out. They finance this rather large purchase ($750K times about 13,500 licenses = $10 billion) by a bond issue. They then put in place a specific sales tax on taxi rides that leaves the post-change price lower than the prices charged under the medallion system but nevertheless is sufficient to pay off the bond because of reduced deadweight losses and increased numbers of cab rides. The tax expires when the bonds are fully paid off.
The scheme compensates the losers from the change by a tax on the beneficiaries. In the absence of companies that exist solely to facilitate medallion sales, it would be Pareto efficient; instead, it's likely only Kaldor-Hicks. We could imagine some compensation to Medallion Financial Group, though, that would still make the whole thing Pareto.
In the Canadian dairy case, it would be much more complicated because of the way that the Canadian system runs cross-subsidies from "industrial" milk to consumer fluid milk: the tax would have to be on the portions of milk sales that currently earn a premium. Otherwise, it would be similar but would cost a lot more -- best guess, around $25 billion. 978,000 cows * $25,000 per permit.
Think about those numbers. The capitalized value of the rents conferred by the Canadian dairy system and the New York City taxicab system together amount roughly to thirty percent of New Zealand GDP. Ugh.
Ok, so why am I wrong? It looks Pareto to me. What am I missing?