Don’t be stupid. In return for putting up with the hassles of New York traffic and the risks of being robbed — not to mention the occasional drunk who leaves his partially digested dinner on the back seat — a driver can expect to net a measly $15 an hour. That explains why the vast majority are young immigrants lacking marketable skills (and, often, command of the English language). But it certainly doesn’t explain why one fortunate investor recently found a buyer willing to pay $1,000,000 for a New York City taxi “medallion,” the little aluminum plate screwed onto taxi hoods that gives the owner the right to operate a single yellow cab in Gotham.

We don’t know if a taxi medallion is actually worth a million bucks. But we do know that the six-figure transaction is an eye-catching consequence of what economists call “regulatory capture,” in which the regulated gain control over their regulators – in this case, City Hall.

There are some good reasons to regulate taxis. When you flag one down, you’d like to be sure that the driver has a license, the vehicle is insured and the meter ticks along at the advertised rate. But in New York (and, to be fair, most other cities), the regulators’ first loyalty is to the interests that butter their bread. So, while New York’s Taxi and Limousine Commission does pay attention to safety and does work at discouraging fraud, its primary task is the care and feeding of the investors in the taxi cartel.

When the Great Depression hit New York and the city’s 30,000 taxi owners couldn’t pay their bills, the city’s impulse was not unlike that of the Roosevelt Administration in Washington: limit supply, so that demand would be adequate to support the suppliers left standing. FDR’s plans were (thankfully) declared unconstitutional, but New York City’s taxi cartel was there to stay. To operate a yellow cab and solicit passengers on the street you need a medallion. And the number of medallions is fixed at 13,237 – roughly 3,000 fewer than in the year (1937) the system was created.

A minority of medallion taxis must be owner-operated, but the owners are free to lease them to others when they aren’t behind the wheel. The rest are “corporate” medallions, which give the owners – any investor is welcome — the right to attach them to cabs and lease them to the highest bidders.

The taxi commission sets fares according to criteria vaguely related to operating costs, and taxi owners are perennially happy to explain that they are too low. But one fact proves the owners have it all wrong: investors are willing to pay a lot of money for the privilege of joining the government-enforced cartel.

As a thought experiment, let’s say the expected return on a $1 million medallion is seven percent annually (a low figure in light of the risks). To meet expectations, fare would have to be high enough to yield about $200 a day in profits. Yes, that’s right: $200 a day, after netting out the cost of drivers, fuel, maintenance and vehicle depreciation!

Of course, it’s hard to say what the “right” regulated fare would be because we don’t know what the “right” number of taxis is. In a competitive market, the quantity and the price would be set simultaneously by the invisible hand. Such an auction market wouldn’t work very well in New York, since patrons – many of whom are strangers to the city – would have to negotiate fares each time they flagged down a taxi. But one could imagine switching to a system like the one in Washington DC, where fares are regulated, but anyone who meets minimum service criteria can go into the taxi business.

Don’t hold your breath. If corporate medallions are worth $1 million each, the whole lot of them is worth something north of $10 billion (owner-operated medallions are presumably worth less than $1 million). And the owners are hardly likely to give up this unearned, government-defended surplus without a struggle. In any event, there’s no one around willing to give them a fight.

The wholesale cartelization of American industry didn’t survive in the 1930s, but arguably, only because the unelected geezers on the Supreme Court didn’t give a toss what the powerful business interests who favored the National Recovery Act thought of them. All too often, though, the wheels of regulation grind in only one direction.

The explanation, offered by James Surowiecki in the New Yorker, is right on the mark: In the American political system, a highly focused, well-funded lobby with tight connections in every House district is almost unbeatable when it chooses to play rough. And since this particular political game is over, we won’t rehash arguments about whether the proposed curbs on their behavior would have made sense. But their surprising (to some) escape from federal oversight does offer a nice excuse to remind readers that auto dealers aren’t always against regulation. Indeed, it is hard to think of an industry that depends so heavily on government protection from the cruel realities of the free market for their daily bread, not to mention their vacation homes in Florida.

The protection in question is auto dealer franchising laws, which vary a bit from state to state, but are generally the very model of what government ought not to do. Starting in the 1930s, car dealers organized to get Congress to, in effect, set minimum standards of treatment in their franchise agreements. As Jessica Higashiyama, who recently received her JD from UC San Francisco’s Hastings Law School, recounts, Congress was happy to oblige, but the federal courts were less receptive to the idea that Detroit had duties to franchisees beyond those spelled out in the contracts that both parties had voluntarily signed. So the dealers turned to state legislatures and managed to get some remarkable deals from many of them.

Pretty much all the auto franchise laws give dealers immense bargaining power in obtaining compensation if a car maker chooses to stop selling a model line (think Pontiac) or to stop selling cars entirely though a particular dealer. Indeed, GM and Chrysler had to back away from tough dealer-streamlining plans in bankruptcy because the process was too expensive. Some states make it illegal to sell cars at lower prices to high-volume dealers than to low-volume franchisees. Some prohibit car companies from selling directly to the public (say, via the Internet) because it would adversely affect the competitive position of the dealers. And a number are even considering laws requiring the automakers to compensate dealers for warranty repairs at the dealers’ bloated retail repair rates.

Is there ever a good economic case to be made for government intervention in a franchise relationship beyond the protections afforded by contract, fraud and antitrust laws? Consider it a challenge, dear readers, to think of one. What we are pretty sure of, though, is that car dealers’ friends in state legislatures won’t be waiting around for the law-and-economics types to debate the matter.