Surge pricing can be bad even if it is “efficient.”
(Reposting this post from 2014.)
The amazing thing about arguments with people over Uber’s surge pricing is that the unreservedly pro-surge pricing people seem to think that only they understand basic economics and that the people they are arguing against are simply stupid. The most spectacular example of this must be Georgetown professor Jason Brennan. He has seriously argued that voting should favor the knowledge elite (“More knowledgeable citizens’ votes [should] count more.”), and, in a since-deleted tweet, probably-jokingly suggested that disagreeing with Uber surge pricing was grounds for disenfranchisement.
There are a number of problems with this–not least of which are the claims that surge pricing is easily gamed by drivers and otherwise may not actually reflect supply and demand. But let’s put that aside and assume that surge pricing works exactly as its proponents say: it gets more cars on the road, increases net social utility, and so on.
Because what if, in some circumstances, you just don’t care? Economics tells you, at most, what the consequences of certain policy decisions are. But it doesn’t tell you why you should prefer one set of consequences over another.
Let me explain exactly what I mean: It may be that in some situations, for some people, the idea that people with more disposable income should get rides first is so morally reprehensible that they’re willing to take the hit on net social utility. In fact, a lot of people seem to think this–price gouging is almost universally condemned after natural disasters. You might be able to draw a distinction (price gouging is just opportunism, but surge pricing is a price signal that increases supply) but certain similarities remain. In particular, the people who can afford to pay most for rides are not necessarily the people who need rides most. The idea that someone should be able to jump the queue ahead of someone who might need a ride more in an emergency situation simply by paying more bothers a lot of people–and this is an ethical stance, not an economic one. Not to mention resentment at percived profiteering. (The best counter to this position is that a first-come first-serve system, with more shortages, is not clearly more just to one where the rich can jump to the front of the line.)
Nevertheless, what I’m saying is this: It is a legitimate ethical stance to prefer some level of shortages and queueing to an economic system that produces greater “utility” but disproportionately benefits the wealthy. It may be wrong to deny that this tradeoff exists, but picking one outcome over another is not a matter of intelligence, but of values.
More broadly this tradeoff is similar to broader social questions, such as whether it is better to have a society that is wealthier, but unequal, or one that is slightly poorer, but more equal. A lot of people would argue that the more-equal society would be happier, and therefore the preferable choice. In any event preferring the poorer but more equal society over the richer but less equal society is not a matter of stupidity. Similarly, expressing reservations with surge pricing may be a reasonable ethical view that takes full account of the likely consequences.
Surge pricing is entirely unobjectionable most of the time (New Year’s Eve, after a big sporting event, and so on) but, in times of emergency or natural disasters, there needs to be a way to make sure that people with genuine need get priority over those who merely have the ability to pay more. Granted, it’s hard to know exactly how to pull that off–but unless there’s a way to do it, you’re better off with a first-come first-serve system, or maybe just increasing the amount that drivers get from each ride without raising prices for passengers.