Thursday, February 13, 2014

Uber surge pricing: anti-congestion pricing and economic externalities

I'm a devotee of NPR's Planet Money podcast, but listening to a recent episode had me screaming at my—well, at my earbuds—when they described how Uber's surge pricing and business model was good for everyone. The episode is moderately informative, but I take issue with a major premise of their reporting: the argument that charging a lot for service and matching supply and demand is a benefit for all users. You can listen to the entirety of the episode here; the segment I take issue with starts around 11:00.

Here's a quick breakdown of the conversation:
  • Uber benefits car drivers, because they can make more money when prices "surge."
  • Uber benefits people with high disposable income ($150 for a trip from Manhattan to Brooklyn), because they can choose to pay a lot of money to get a car when demand is high.
  • Uber benefits people waiting for cabs because Uber gets more cars on the road, so the wait time for other cars is less.
The last piece is where I take issue. In a closed system, this would be the case. But it's not. Here's a quote from the show: "when drivers see an area of the city where fares are high … they all go there." Remember, we're talking about New York City. When there's a congested area, Uber provides an incentive for more drivers to go to this congested area. This creates more congestion, which actually results in slower speeds for taxicabs, and—I would posit—fewer available rides for people not willing to pay a lot of money, not more, as they suggest.

Which is fine, in economic theory. However, when looking at traffic, "congestion" is shorthand for "demand." So by attempting to provide efficient transportation options, it is a transfer of utility from the poor to the rich. Taxicabs are strictly regulated because they serve as a part of the transportation network, both in fare and in number. By sending a fleet of expensive black cars to a congested area, Uber squeezes out the more affordable taxis from the street. Someone willing to pay triple the fare for a ride might call and Uber, but someone who can't afford that service now has a potentially longer wait for a cab (which can't get to the area due to congestion) and then everyone has a longer ride due to the congestion. Part of the taxicab regulations—at least in theory—provide enough cabs to provide service without gridlocking the city (obviously, here too theory and practice are almost mutually exclusive). Adding more and more cars to already congested streets creates crippling congestion. That's—to use economist speak—a major negative externality for everyone.

Now the argument could be made that people waiting for cabs should just take the subway. It's a good argument; in the podcast they interviewed someone waiting in a 30 minute cab line, in the snow, at Penn Station for a ride "downtown," an area well-served by the nearby subway (for lower prices, too). And for some of these riders, they might make that choice. But others probably have rational reasons to look for a cab: perhaps they have a bulky item. Perhaps they're trying to get somewhere not well-served by transit. Plus, the added street-level congestion might drive more people to use the subway, which will create more congestion below-ground too. Adding more vehicles above-ground doesn't seem like a great solution.

Uber's surge pricing, in my view, is the opposite of congestion pricing. What works in London and Singapore has faced stiff opposition in New York City (especially from interests outside the city). With congestion pricing, Uber (in theory) would make more sense, since the overall traffic would (in theory) be mitigated enough that surge pricing wouldn't send more cars in to already-congested areas. Until then, Uber's surge pricing is part of the problem, not part of the solution. And it certainly doesn't benefit the vast majority of travelers.


  1. I have to disagree with you on your assessment. The number of Uber drivers on the road at one time is not fixed. Each Uber driver decides for him or herself when to go out and accept trip requests from people. During bad weather, fewer drivers tend to make themselves available since the risk of getting stuck or getting in a crash is higher. In order to compensate for that risk, Uber sets surge pricing to encourage more drivers to go out on the road.

    I've noticed in Boston when the weather is inclement, the traditional taxi cab stands all empty out. The demand is higher than the supply. If someone really needed a taxi and was willing to pay more for it, they current cannot and are forced to wait. Higher rates in times of high demand would reduce overall demand, since people who don't really need a taxi could use a different mode.

    To me, the Uber system is really the free market at work, and it makes a lot of sense. In times when demand is higher than supply, rates go up. This encourages more Uber drivers to get out there on the road and makes them available for the passengers who value the trip the most.

    Income disparity is always an issue with free market economics. People who can afford to pay more are indeed at an advantage. I don't have a good answer to that problem, but I generally don't think it's fair to force everyone to sacrifice their time when they are willing to pay more to get better service. It's the same issue with highway congestion and congestion pricing. Right now we are all forced to pay with our time, regardless of how important one particular trip is over another. That's one reason I like HOT lanes. It gives people the option to pay money to save time if that's what they want to do.

  2. @Charlie: point well taken. A few rebuttals:

    1. During times of inclement weather, I think this is less of a case. The same during times of high demand when there is not much other congestion (late nights, for example). My issue is that some of these surge times are at rush hour when—especially in New York—we need fewer cars on the street, not more. By encouraging drivers to serve these areas, Uber is adding to this overall congestion and providing a betters service for the 1% at the expense of other taxicab riders but also bus riders, pedestrians and cyclists. More cars is rarely a good solution.

    2. There's then the issue of having more cars driving around with the drivers being told where to go by smartphones. As someone who has railed on the behavior of taxicabs (would it kill them to turn their lights on at night?) more distracted drivers is never a good thing. And don't get me started on Lyft and Sidecar, which encourage people to drive around more. Yes, they may be fulfilling a market need, but the externalities (more cars, more congestion, less safety) make it a market that should be regulated and capped.

    3. I'm with you on HOT lanes, but there is an added wrinkle there that the extra revenues can be used to support other, more efficient options. For Uber, they go in to the pocket of the drivers (which is not a bad thing, but it doesn't encourage more efficient transportation). For instance, I would be a huge proponent of HOT lanes on I-93 north from Boston to New Hampshire. Free for 3+ HOV, half price for 2+ and full fare for SOV, for instance. This is a section of roadway which sees hours-long backups daily, and a free-flowing lane could probably be priced at $10 or more at these times and attract SOV users. The number of carpoolers and vanpoolers, as well as bus users, would also increase dramatically; there are already dozens of buses traveling this route at rush hour.

  3. Left off a bit on the last comment: At $10 per car and 1000 vehicles per day, that's $10,000 per day, or $2.5m per year, which can go towards subsidies for vanpools, buses and parallel transit lines. Uber doesn't have a direct benefit to transit ridership.

  4. Thanks Ari. That's a tricky problem during inclement weather when you want fewer cars on the road in general. The big question is, if people are using Uber during the storms because Uber wasn't available, would they (a) take transit, (b) not take the trip at all, or (c) use their own car? If the answer is (a) or (b), then yes Uber is really not helping things, but if the answer is (c) it's actually resulting in fewer cars on the road. I don't have any data to show which of those three options are generally the case, so I can't really come to any meaningful conclusion.

    I'd love to push for HOT lanes in Massachusetts. The big stumbling block I've seen is the methodology that state agencies seem to use for creating them. The Boston MPO (I think it was them) did a study of adding HOT lanes to 128 by reallocating a travel lane (the travel lane they are building now through the widening project), and their conclusion was that they could not add them because it would create too much vehicle congestion in the non-HOT lanes. (And they were taking about vehicle-delay, not person-delay, so one bus in the HOT lane was measured equal to one single occupancy car in the non-HOT lanes.) I've seen this argument used in other states too, that they can only add HOT lanes if it doesn't worsen congestion in the non-HOT lanes, which means that the only way HOT lanes can be added is by widening the roads and not by reallocating existing lanes. This is such backwards logic, it's infuriating. Road widening is expensive and destructive, especially in built-up areas. If the HOT lanes do their job, congestion in the non-HOT lanes should go down over time as more people use buses and carpools, and therefore road widening is not only unnecessary but a waste of money.

    1. Oops I meant to say "if people didn't use Uber during the storms because Uber wasn't available"

  5. I find this argument specious, especially in a city like NYC which has humongous capacity above and below ground. It will be seized on by corrupt cab interests looking for any excuse to quash competition. But private cars are really the space wasters, and every time a person decides not to drive their private car in the city it's a victory for NYC. If Uber helps with that goal it easily outweighs any congestion caused by the service vehicle. The real answer to this is road pricing, as you mentioned, of course.

    Another thought comes to mind: when you see a swarm of yellow cabs in Manhattan, that usually means it's not difficult to snag one. Generally, the difficulty comes when there are few cabs, or they are speeding by quickly, already with passengers. That's when you'd be more inclined to call up a ride sharing service. But by definition, there's little congestion. In the past, I would just start walking to my destination in such a situation. Sometimes I'd get there before a cab ever bothered to stop. Honestly, even though I have the apps on my phone now, I'd probably do the same today. And all that assumes the subway wasn't a good option, which is fastest when it is.

    1. I'm wondering about the contention that Uber replaces trips that would otherwise be made by private cars. If we look at Manhattan, there is already a major disincentive to driving: parking. If you have a parking space, you have to get to the garage, get your car (which often requires calling and giving advanced notice to the valet) and you're paying through the nose for the privilege. If you use street parking, you have to hope you'll find street parking when you return (to say nothing of twice-a-week street sweeping). So I don't really think that anyone is giving up a private vehicle for an Uber. If they have a car, they're going somewhere outside the range of affordable taxicabs or car services. If not, taxis and Uber-type cars add vehicles to the street.

      I agree that taxicabs are overregulated, and medallions should be regulated more by the level of service provided (amount of insurance provided, quality of vehicle, drivers without infractions or complaints) rather than how much they are worth. But if surge pricing is a product of demand, there will already be a lot of yellow cabs in a surge-priced area. Uber is giving you the option, as you stated, to call a car instead of walking or taking the subway. Which adds vehicles to the street.