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Uber’s price policy makes economists sad

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Published : 2014-07-11 21:09
Updated : 2014-07-11 21:09

New York just killed every economist’s favorite thing about Uber: surge pricing. Sure, many economists also love convenient car service at the touch of a button. But black-car services have been around for a long time. Explicit surge pricing ― which both creates new supply and rations demand ― has not, but it’s long been a core feature of Uber Technologies Inc.’s business model. While it can be annoying at times (during a recent rainstorm, I noticed a sudden epidemic of drivers canceling rides, which I suspect was due to the rapidly rising surge price), it also allows you to be sure that you will be able to get a taxi on New Year’s Eve or during a rainstorm as long as you’re willing to pay extra.

Sadly, no one else loves surge pricing as much as economists do. Instead of getting all excited about the subtle, elegant machinery of price discovery, people get all outraged about “price gouging.” No matter how earnestly economists and their fellow travelers explain that this is irrational madness ― that price gouging actually makes everyone better off by ensuring greater supply and allocating the supply to (approximately) those with the greatest demand ― the rest of the country continues to view marking up generators after a hurricane, or similar maneuvers, as a pretty serious moral crime.

Some of the outraged people happen to be legislators, who then go and make laws against price gouging in emergencies, which apparently include needing to get a taxi in a bad snowstorm. New York has such a law, and its attorney general was preparing to go after Uber for violating it. In response, the company has announced that it will cap its surge-pricing rates, not just in New York but throughout the country.

This is going to make many people worse off: the drivers who would have liked to make extra on rides, and the riders who don’t get rides because some drivers couldn’t be lured out of their warm beds on a cold and needy night. Of course, the people who manage to get rides will be better off, but there will be fewer of them, and it’ll be harder to predict whether they’ll succeed in getting a cab. It’s the difference between a raffle ticket and a charity auction.

Yet when it comes to these sorts of transactions, we seem to instinctively prefer the raffle ticket. Michael Munger argues that this is because we don’t see them as “euvoluntary,” or truly voluntary. The aspect of great need makes them feel coercive, even if the person fulfilling the need is not the person who created it. So we’d rather that no one gets ice after a hurricane than see entrepreneurial people get rich selling it to willing buyers. So while this latest development is not economically optimal, it was probably politically predictable.

By Megan McArdle

Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy. She is the author of “The Up Side of Down.” ― Ed.

(Bloomberg)

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