I wrote twice previously about Uber jacking up prices in an emergency in Sydney, Australia (I, II). In both cases, I have pointed out that in addition to it being rational for many (and perhaps even the majority) to prefer non-surging in emergencies, it’s also totally plausible aggregate utility, measured in conventional ways, is maximized by not surging. This is true even if increasing prices causes significant supply increases (which nobody has demonstrated happens in snap emergencies like these). The reason people miss this is because their Econ 101 reasoning ignores the way diminishing marginal utility and inequality disrupt the analysis. Here, I want to give one last push to that with a concrete example.
Suppose that, in a given location, 10 people will normally hail an Uber cab, and 10 drivers will normally be cruising about to accept them. Now suppose that, because of an emergency, the number of people trying to hail a cab shoots to 100 people. In response, Uber jacks up prices very high, which has the effect of bringing 10 additional drivers on to the road. That means there are now 20 drivers (a doubling of supply) and 20 of the 100 people trying to hail an Uber cab succeeds in doing so.
Under Econ 101 analysis, you say that there was a welfare increase here. See, there were 20 people who got Uber cabs rather than 10 people. But, as I keep pointing out, this argument is not determinative if we assume the 100 people vying for Uber cabs have unequal economic resources. Further, the more unequal the resources are among those people, the more likely using prices like this actually decreases aggregate utility.
To see why, consider these two scenarios:
- Rider Demand: 100
- Cab Supply: 10
- Chance of Getting a Cab: 10% for all 100 riders
- Rider Demand: 100
- Cab Supply: 20
- Chance of Getting a Cab: 100% for wealthiest 20 riders, 0% for other 80 riders
From a glance, you can immediately see that for the bottom 80 riders, the rational preference should be the Non-Surge. In Non-Surge, their odds of getting a cab are 10%. In Surge, their odds of getting a cab are 0%. Don’t let stupid journalists confuse you on this point.
As far as aggregate utility goes, we just have no idea whether Non-Surge or Surge maximizes aggregate utility in this situation. The argument that says it’s totally obvious that Surge maximizes aggregate utility is premised upon the assumption that the willingness of the 20 riders to pay that high amount shows that they are getting more utility out of the ride than the other 80 would. But that assumption does not hold where there is significant inequality between the 100 riders. If the top 20 riders are super-wealthy, it could be that they are willing to majorly outbid the other 80 even though they don’t really get that much utility out of the ride. It’s just that, because of the diminishing marginal utility of money, the amount that they spend isn’t really worth much to them.
You might think that, even with this inequality point noted, it’s clear utility is maximized because 20 rides always means more utility than 10 rides. But this too isn’t true. You’ve got to add up the utility each ride gives. It’s quite possible that the 10 lottery rides will produce twice as much utility per ride (because they aren’t all going to wealthy people who actually don’t get that much utility out of them) as the 20 wealthy rides. This is not only possibly true for a given lottery outcome, but is also possibly true on average over 1000 lottery simulations or whatever, meaning that using the 10% lottery could, even on average, maximize utility.
So even when you assume massive supply response (which is a big assumption), you still find yourself in a situation where the rational preference of the vast majority is to Non-Surge. You also find yourself in a situation where you have no idea whether Surge or Non-Surge maximizes aggregate utility and a situation where it is totally plausible (in an unequal society) that the Non-Surge lottery does so. Assuming away all of the realities of actual societies can make you feel like you are Super Rational Obvious Economics Man, but you’re really just doing bourgeois ritual dances.