Question

Storm Surge: Uber Just Doubled Car Service Pricing in NYC In the wake of Hurricane Sandy, Uber, which provides a mobile application for locating and booking car service, has reinstated "Surge Pricing" in New York City. This means that car drivers can charge exorbitant fees to shuttle riders around. This is an incentive for more drivers to ferry passengers. The higher fares tripled the number of cars on the road and kept the drivers out longer, the company says, but it also cost Uber more than \(\$ 100,000\) in additional payments to drivers. a. Who is practicing price gouging: Uber or the car drivers or both? Explain. b. Evaluate the fairness of "surge pricing" reinstated by Uber in the wake of Hurricane Sandy.

Short answer

Both Uber and the car drivers are practicing price gouging. The fairness of surge pricing is debatable; it incentivizes more drivers but burdens consumers with higher costs.

Step-by-step solution

Identify the Entities

First, identify the entities involved in the scenario: Uber and the car drivers.

Understanding Price Gouging

Price gouging typically refers to the act of raising prices on essential goods or services to an unfair level, especially during a crisis.

Question a - Who is practicing price gouging?

Determine who is increasing the prices. Here, Uber has a policy called 'Surge Pricing' which allows car drivers to charge higher prices. Thus, both Uber and the car drivers are practicing price gouging because Uber enables it and the drivers implement it.

Define 'Surge Pricing'

'Surge Pricing' is a practice where the cost of a service increases due to high demand. Uber uses this model to incentivize more drivers to work when demand is high.

Question b - Fairness of Surge Pricing

Evaluate the fairness of surge pricing. Consider the context: Hurricane Sandy caused increased demand for transportation. Surge pricing can be seen as fair because it incentivizes more drivers to come out, thereby increasing supply. However, it can also be seen as unfair to the consumers, who are already dealing with a crisis and now have to pay higher rates.

Key concepts

Price Gouging

Price gouging occurs when businesses increase the prices of essential goods or services to an extremely high and often unreasonable level during times of emergency. This practice is usually seen during natural disasters, crises, or other situations where consumer needs suddenly spike.
In the case of Hurricane Sandy, both Uber and the car drivers can be considered as practicing price gouging. Uber implemented 'Surge Pricing,' a system where the rates increase significantly when demand is very high.
While the intention is to attract more drivers to meet the higher demand, the result is much higher costs for the consumers who are already in a tough situation.

Incentive Structures

Incentive structures are mechanisms put in place to motivate individuals or groups to perform certain actions or change behavior. In economics, incentives are crucial for influencing the behavior of consumers and producers.
Uber's Surge Pricing is designed as an incentive structure. By raising fares during high-demand periods, Uber incentivizes more drivers to come out and offer their services. This increase in supply helps to meet the surge in demand.
While creating incentives is generally beneficial for balancing supply and demand, the downside arises when the incentives lead to excessive prices, potentially harming consumers.

Market Demand and Supply

The fundamental concepts of market demand and supply explain how prices and quantities of goods and services are determined in a market.
In general:

• Demand refers to how much of a product or service consumers want.
• Supply refers to how much the market can offer.

Market equilibrium is achieved when the quantity supplied equals the quantity demanded at a particular price level.
In the scenario of Hurricane Sandy, the surge in demand for transportation services heavily outweighs the available supply. Surge Pricing helps restore equilibrium by encouraging more drivers to offer their services, though at a much higher price, which naturally reduces the excess demand.

Crisis Economics

Crisis economics focuses on the economic challenges and policies during periods of extreme financial stress or disaster. These periods can cause massive disruptions in the normal functioning of the economy.
During Hurricane Sandy, people needed reliable transportation more than ever. The crisis disrupted normal transportation services, causing a spike in demand. Uber's implementation of Surge Pricing is an example of how crisis economics operates. It alters typical economic behaviors to address the immediate needs brought on by the crisis.
While this strategy can bring more resources (like drivers) into play, it can also lead to higher costs for already-stressed consumers, balancing the supply-demand equation but with adverse effects on affordability for many.