Surge pricing by cab aggregators has attracted controversy many
times and in many places. Most agree that surge pricing during natural or
man- made calamities is inhumane and insensitive, as it allows people to make
money out of someone else’s misery. And this sounds rather repulsive, so that
issue is settled rather simply. But when we are talking about regular
situations, it sounds legitimate that people should be allowed to make money
and profit according to the laws of supply and demand, right? That’s what free
markets are all about.
Let’s for some time assume that it’s okay to apply the
principle of free markets to cab pricing. If we are applying the principal of
free markets then shouldn’t we apply it to everything related to plying cabs?
Plying cabs requires the use of public infrastructure such as roads and
highways. Maybe all roads, not just highways and expressways should be tolled
and the tolls should vary according to the traffic. Plying cabs also imposes cost
on the environment by polluting the air. Cars should be taxed according to the
pollutants they emit, and the rate of this emission should also be varied
according to the number of the cars on the road, as the same amount of
pollutants are more harmful when the air is already polluted. If this were to
be done, even then, if all the costs were passed on to the consumer, the prices
would be more when the demand is higher, but at least the increase in prices
would not be as arbitrary as the present model of surge pricing followed by
aggregators.
Now let’s look at why the principle of free markets should
or should not be applied here.
The free market believes that the ones who can pay the
highest amount for a good or service are the ones who value it the most and hence
we can bring greatest utility by letting them have that limited resource. First
let’s differentiate between willingness to pay and ability to pay. Willingness
to pay may still be an indicator of how much one values a certain good, but
what we have here is actually ability to pay. Then, is willingness to pay
really the best or only way to allocate this resource, assuming its limited?
Why shouldn’t it be allocated instead by waiting in a line? Waiting too is a
measure of how badly one needs a cab, right? Or why not just leave it to luck,
let’s have a lottery to decide who gets a cab?
Cabs are a means of transportation, and transportation is in
a way a public good. It is a necessity for people to carry on with their normal
business. One can argue that public transportation like trains, metros and
government run buses are supposed to take care if the needs of the public.
However, public transportation is clearly inadequate in most parts of our
country, and private cabs play an important role in bridging that gap. Given
this, it should be treated like a public good and prices should be regulated. There
is also the possibility that surge pricing may give drivers perverse incentives
to create a situation of artificial scarcity. Drivers can go off the Uber grid
and then come back when the prices are higher.
All I am trying to say is we really need to rethink our faith in the power of free markets.
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