India's Price Ceiling On Uber Rides Hurts Riders, Drivers And The Economy*

Co-authored by Jon Hartley and Nawaphon Sittisawassakul

Recent regulatory blowback against Uber, Lyft and other ridesharing services around the world have reignited the ongoing regulatory policydebatesurrounding the ride service in India, Uber's second biggestmarketin terms of cities where it operates. Most prominently, India's government recentlyenacted legislationthat allows major cities to arbitrarily set limits how much ride service companies such as Uber can charge riders during peak times.

As surge pricing often results in fares above the new price ceilings set by the Indian government resulting in supply-demand problems, a potential shortage of ridesproblemnow arises during times of peak demand. Meanwhile,opponentsagainst surge pricing in India argue that the fare price ceiling helps to maintain competitive fares for current cab drivers.

Price ceilings on Uber fares will create shortages of available drivers, longer wait times and deadweight loss

If India really cared for its drivers and riders, it would remove the price ceiling for surge pricing during peak times in order for the supply-demand of rides to reach what economists call an equilibrium. There areexamplesthroughout history that when a government sets these sort of price controls on goods, it interferes with the natural supply and demand equilibrium price and amount of those goods, creating shortages and surpluses. For example, long lines formed at gas stations during the 1970s when the U.S. government put a price ceiling on gasoline, stopping the price from going high enough to reach the equilibrium market clearing price between consumers and producers, creating a shortage. Consumers were incentivized to consume more of the good than they would have consumed under normal market conditions and producers were incentivized to produce less of the good because they couldn't sell at a price high enough to recoup costs and make profits.

India's current price ceiling and the predictable shortages for rides during peak times is bad for both the riders, drivers, society, and leads to adeadweight lossbecause of the misallocation of time, money, human capital and human potential.

New academic research highlights how surge pricing is necessary to prevent shortages of Uber rides

Anew paperby researchers at the University of Chicago Booth School of Businessthe economics of Uber's surge pricing demonstrates that in the absence of surge pricing at peak times wait times for rides increased from the average of less than three minutes for those willing to pay the surge pricing, to over fifteen minutes across the board.

The graphs below illustrate Uber's surge pricing mechanism behind incentivizing more drivers to come out during peak times, and what happens when this mechanism fails, in order to have a constant and ready supply of drivers for riders willing to pay. Based on the first graph, we can see that Uber incentivizes its drivers with a price high enough for them to outnumber ride requests most of the time. This helps to make sure the supply of drivers is ready for riders at any given time and keeps the riders happy. In the second graph, the Booth School paper talked about how because of the surge price outage, the price of a ride couldn't go high enough to signal to Uber drivers to come out, thus resulting in longer wait times.

In the case of India, because the signal of the higher surge price isn't there under the price ceiling and because the drivers' opportunity costs of going out and driving around are higher than the money they hope to make, they aren't willing to come out to pick up those who value the ride more and who would be willing to pay higher than the price ceiling. This is money that the driver would otherwise be making if there were no price ceiling and it thus leads to less producer surplus because the driver isn't producing the ride. It also leads to a decrease in consumer surplus because those who want rides and are willing to pay the higher prices can't get rides. This decrease of consumer and producer surplus leads to deadweight loss, which is economically inefficient.

How India's Uber price ceiling could widen a mismatch of demand and supply for rides

To give anideaof the supply of and demand gap for rides in India, Mumbai has only has a third of the amount of taxis as New York despite having four times the population. Because India's price ceiling doesn't incentivize as many drivers to come out at peak times as would be needed for the market to clear, people are left hailing rides longer than necessary. This wastes time that they could be using to be more productive, used to build human capital, or put more of their time toward other projects. A recentWashington Postarticlehypothesized that the amount of time people waste while waiting in commutes in just the U.S. in one year alone could have been used to build hundreds of the pyramids of Giza. Imagine what India can do with all of that human potential being put to better use and all the private and public projects they can accomplish.

Furthermore, if someone is in a hurry or valued their time more by being somewhere else, say somewhere where they are more productive, and is wiling to pay to get there but can't get there because there aren't enough rides during peak times, this leads to a misallocation of human resources to their most preferred ends.

In 2015, India was the second mostpopulatedcountry in the world and was Uber's second biggest market. That is why repealing the price ceiling is so important for both India and for the ride-hailing industry there. In order for India's economy to move forward and compete on a global scale, they must aim for legislation that will allow resources like their citizens' time, money, human capital, and human potential to go toward to their most preferred and efficient uses in order to maximize their country's utility so they can progress.

Comments: As a consumer, I really enjoy the convenience of using Uber rides. For example, last month, I used the Uber app. to request a ride after I landed at O'hare at 4 am in the morning. This is an amazing example of how capitalism contributes to innovation that facilitates our lives. It also allows anyone, within given restrictions, to earn money with greater flexibility, such as students in this class. However, I also observed some negative factors that are listed as follows:

1. surge in price
2. destroying the taxi cab industry
3. additional traffic, especially during rush hours-read about newly enacted taxes in Chicago*
4. the fierce competition is destroying the concept of earning a "living wage." As the number of driver surges, the earning potential for a driver falls.

Questions to answer:

Please, analyze the impact of Uber in larger cities, especially in Chicago. Do you think we should create a additional laws in order to curb Uber's expansions? Should we subsidize Taxi cab drivers? Do you think that the newly implemented congestion tax is a good idea?*Or, Is another gimmick by the city's government to raise taxes on its citizens? Based on your reading, should we let the free market dictates? The unintended consequences of government's well intended regulations could be bad for consumers, such availability of Taxi cabs in the Southside of Chicago.

https://www.forbes.com/sites/jonhartley/2016/05/31/indias-price-ceiling-on-uber-rides-hurts-riders-drivers-and-the-economy/?sh=47b27a112e0e

https://www.nytimes.com/1999/10/28/business/variable-price-coke-machine-being-tested.html

https://www.illinoispolicy.org/tax-on-uber-lyft-rides-in-downtown-chicago-set-to-triple-jan-1/

drivers to come out, thus resulting in longer wait times. . RIDE REQUESTS . USERS OPENING THE APP . DRIVER SUPPLY SURGE PERIOD 4002 Percentage Increases Over Pre-Surge Baseline 8:00PM 8:30PM 900PM 230 PM 10:00 PM 10:30 PM 11:00PM 11:30 PM 12:00AM 12:30AM 1:00AM 1:30AM This graph shows the supply and demand of Uber rides during a busy night where those willing to pay the surge price waited an average of less than three minutes before getting a ride. (Courtesy: chicagobooth.edu, Chris Nosko) SURGE Surge Multiplier OUTAGE 0-CO PM 10:00 PM 11:00 PM 12:03 AM 1:00 AM 2:00 AM 3:00 AM 4:00 AM 400 AM