With no better choice, I booked Uber. A few minutes later, as I sat in the cab watching the rain, a thought occurred to me. What would have happened if Uber had charged me the usual fare? Would I have still got a cab? Would it have been available at all?
Those questions are at the heart of a misunderstood idea in economics. Many people think surge pricing is a way for ride-hailing companies to earn more money from the inconvenience of its customers. This may appear to be right, but it actually is not. There is another angle to it. The real purpose of surge pricing is not to extract more money from passengers, but to attract more drivers.
While demand for cabs was definitely high, supply was not. If you don’t increase supply, the result will not be lower prices. It would be something worse, no cabs. Drivers who want to go home would go as there would be no incentive to continue work in the punishing rain. But higher income changes the calculation completely. Economists describe this as using prices to balance demand and supply.
There is another way to look at it. Every scarce resource has to be rationed. If it is not rationed by price, it will be rationed by waiting. Remember how you spent time in passport offices before online appointments came into vogue. The service was inexpensive, but to get it you had to stand in long queues for hours. You paid the price not in terms of money, but in terms of time.
Surge pricing merely makes the cost visible
If regulators ban Uber’s surge pricing, cheaper fares may not benefit commuters. Instead, cab shortages, long waits and cancellations become more common. Scarcity will not disappear but simply shift from price to availability. The real question is whether an immediate Rs 300 ride is preferable to a Rs 150 ride that arrives an hour later.
Whether surge pricing is worthwhile depends on who you are. A student may wait for a cheaper ride, while a surgeon rushing to an emergency will gladly pay more. Surge pricing lets people choose based on how they value time. The next time your ride costs more, you may still get pissed. But ask a question, are you paying more for the ride, or to ensure that the ride exists in the first place? I tell you, the most important function of a price is not to make something expensive. It is to make something available.
