A rhetorical theme is being struck by a number of public figures in the wake of the Manhattan bombing that seriously injured nineteen people, on September 17, 2016.
It’s not about security, terroristic threats, privacy, the attacker, his anger at US foreign policy, or anything along those lines. It’s about prices. Specifically, the criticism is being leveled at the ride-sharing giant, Uber, and how Uber raised prices in the area when people most needed to get away. It’s about so-called “Price Gouging,” or the supplier of a service or item “exploiting” those who want it.
On September 18, the UK publication, The Sun, released a piece with this headline: “’Shame on You’ Uber Accused of Cashing In on Bomb Explosion by Charging Almost Double to Take Terrified New Yorkers Home.” The piece proceeds to outline how angry passengers published blistering social media attacks on Uber for charging 1.8 times the regular fee.
And the points about price hikes were acknowledged by NY reporters. Shaun King, a writer for the NY Daily News who does excellent work keeping his eye on potential police malfeasance, boarded the Tweet-Deck to write : “This is true. My family and I were out in Manhattan and many of our train lines were closed. Uber prices surged up.”
Taken from one perspective, this price hike could be seen as an opportunistic, uncivil attempt to make money from other peoples’ fear and suffering. In fact, criticism of “price gouging” pops up after almost every natural or man-made disaster. After Hurricane Charley in 2004, I wrote about Florida’s then-Attorney General, Charlie Crist, making political hay about hotels raising their prices for rooms, and Washington politicians “waxing heoric” against stores hiking prices for bottled water. It seems people who get their cash from taxation are some of the most vocal critics of this phenomenon.
But a quick look at economics and economic incentives/disincentives shows us that this ability to raise prices is the key to getting more drivers into an area to help people.
We start prosaically, but with a point, with the economic rules of supply and demand, and the key development that allows those factors to change: the Price Mechanism.
As most folks know, the valuation of a product or service is ultimately determined by the consumer. If the consumer is unwilling to buy a product or service, no matter how much work, time, money, etc., went into it, the product or service has no value. Based on this, when supply of something is low compared to consumer demand, or demand is high compared to supply, prices rise. When demand is low compared to supply, prices decrease. The price is the key datum that allows consumers and suppliers to see how much others have valued something, and they can respond to that information.
In the case of consumers, increased prices inspire changing behavior. Once a price gets high enough, consumers look to conserve more or to find an alternative. The price signal also feeds information to the supplier and to other potential suppliers, which, in the case of an emergency or disaster, is essential.
During such times, when consumer demand is high, the prices of what are wanted increase. Demand outstrips supply, and the consumers/bidders for the product or service bid up the price. But this pushes consumers to conserve or search for alternatives. In the case of bottled water in disaster areas, higher prices inspire people not to hoard, thus prolonging the period during which people can get the limited resource. And as those prices rise, the higher price point sends a signal not only to consumers and those already supplying something, but also to potential new suppliers, who, seeing the opportunity for profit, change their behavior from doing their normal tasks, and move into doing a new task, say, supplying water. This increases the number of suppliers, and increases the supply of a good or service, thus helping to reduce prices, or keep them from rising.
As vulgar as some might see this, as opportunistic as some might claim market participants are in these situations, the laws of supply and demand ordain that prices are incentives and disincentives. Prices must be allowed to function in order to increase or decrease supply based on demand. Without the incentive to make money off of a spike in demand, potential suppliers will not enter the area, and people will go without.
In the case of Manhattan, Uber’s policy of higher prices during times of peak demand inspires more drivers to enter the area. This is very important to consider when thinking about potential drivers entering a potentially dangerous area. As much as people who were in Manhattan might have wanted to get out of the danger zone, as they might have seen it based on their terrifying experience near the blast, drivers from outside the area would also have fears – about going into a dangerous area. The potential to make more money helps incentivize them to attenuate their risk-benefit analysis, and possibly make the decision to drive into the city.
The Uber price increase is also a signal to others who don’t drive for Uber. Lyft drivers might monitor the Uber price spike and see the signal, thus making themselves available as well. All of these price incentives actually increase the number of drivers available to help New Yorkers escape the area. While they might be seen as opportunistic, without the higher prices, fewer people would have been able to escape the area of the bombing than did.
Of course, one key factor in all of this is the government, which imposes regulations and forces expensive licenses on cabbies and drivers, to both help certain vested interests and to grab cash. If the government was not involved in deciding who could drive and how much they had to shell out to the politicians for permission to drive, the number of potential drivers would be even higher. All the government licensing scam does is decrease competition.
In the final analysis, people should try to remember the importance of higher prices as signals, and remember that prices decrease the more competitors are allowed to service their needs and wants. People can choose to ride Uber or avoid them if the price is too high, and Uber will see that and try to work accordingly. But to excoriate suppliers even as the supply is kept artificially low by government is uncalled for.
We can keep this in mind the next time political posers slam hard-working people, even while demanding a portion of what they make.