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Saturday, March 26, 2016

Why Economists Love Uber (And Bernie Should, Too)

Curb Your Regulatory Enthusiasm

Over the summer of 2015, senator and presidential candidate Bernie Sanders said that he had “serious problems” with ridesharing company Uber because it was “unregulated.” It’s unclear what he means by this, but if he thinks the service should be treated like traditional taxis, there’s good reason to believe that we’re all better off if it is left “unregulated.” 

Indeed, Uber is relatively unregulated in comparison to traditional taxi services. Economists Judd Cramer and Alan B. Krueger note, 

In many jurisdictions, taxi drivers are required to obtain an occupational license in order to transport passengers, and drivers are restricted from picking up passengers outside of the jurisdiction that issued their license. In addition, the number of taxi drivers is often limited by the number of medallions that are issued, and fares are often set by regulatory bodies.

In contrast, Uber and companies like it, which use mobile apps to connect drivers and passengers, are largely not bound by these regulations. But, contrary to the concerns of Sen. Sanders, lack of top-down regulation hasn’t undermined the quality of Uber’s services — it has enhanced it.

Rather than having prices fixed by city governments, the app determines the price of a ride on the basis of time and distance traveled. It also incorporates “surge pricing” to help match supply and demand when requests for rides (at the normal rate) outstrip the number of drivers available in the area. Drivers from elsewhere are incentivized to go to the places where demand is highest, bringing things back into equilibrium. Eighty percent of top economists polled by the IGM Economic Experts Panel agreed that this strategy increases consumer welfare by increasing the supply of Uber services rendered and allocating rides first to those who value them most.

In a recent article, Hall et al. (2015) examined how the marketplace reacted to the presence or absence of Uber’s surge pricing. They were able to do this by exploiting the fact that a technical glitch occurred in Uber’s surge pricing algorithm during New Year’s Eve in New York City, effectively shutting down surge pricing for close to half an hour.

Both before and after the surge pricing glitch, when surge pricing was in effect, 100 percent of ride requests were completed. But during the glitch, the completion rate dropped to under 25 percent because, without surge pricing, the supply of drivers simply would not rise fast enough to meet the demand, because there was no strong monetary incentive to do so. In addition, people who might have waited for a lower price under surge prices no longer had any reason to wait, and the number of rides demanded spiked in reaction to the lower price.

This natural experiment illustrates the importance of letting markets set dynamic prices rather than having regulatory bodies set them in stone. When the price was flexible, matching supply and demand, everyone who requested a ride got one. When the price was static, below the market rate, one person got a cheaper ride and three people got no ride at all.

On a related note, Smart et al. (2015) found that, in low-income neighborhoods in Los Angeles, Uber services were twice as fast and half as expensive as traditional taxis. In a new study, Cramer and Krueger (2016) found that “UberX drivers spend a significantly higher fraction of their time, and drive a substantially higher share of miles, with a passenger in their car than do taxi drivers.”

In fact, “For every mile that taxi drivers in Los Angeles drives with a passenger in the car, they drive 1.46 miles without a passenger; the comparable figure for UberX drivers is 0.56 mile. This difference likely translates to greater traffic congestion and wasteful fuel consumption.”

According to Cramer and Krueger, the reason that Uber is almost three times more productive than taxis in LA is because of its efficient pricing mechanism and the lack of “inefficient taxi regulations” — presumably the same regulations that Senator Sanders was referring to when he complained about how Uber was “unregulated.”

Thus, it should not be surprising that 100 percent of top economists surveyed by IGM believe that allowing ridesharing companies to compete against traditional taxis, with no restrictions on their prices or routes, raises consumer welfare (provide they adhere to safety and insurance requirements).

There are other benefits of Uber as well. One paper found that Uber’s entrance into markets in California led to a “significant drop” in the rate of alcohol-related motor homicides. Individuals who would have otherwise driven drunk simply took Uber. The author’s results implied that a “complete [national] implementation of Uber X would create a public welfare net of over 1.3 billion to American taxpayers and save roughly 500 lives annually.”

While some other presidential candidates have complained that companies like Uber are creating a “gig-economy,” where temporary positions are common and salaries and benefits are low, a comprehensive analysis of Uber’s “driver-partners” found that “78 percent of driver-partners said they are very satisfied or somewhat satisfied with Uber” and that “Uber driver-partners earn at least as much as taxi drivers and chauffeurs, and in many cases more than taxi drivers and chauffeurs.”

Overall, there is a tremendous amount of evidence that ridesharing provides a number of social benefits, from lowering pollution to reducing drunk driving, and is less costly and more productive than traditional taxi services. These successes are mostly due to its not being shackled by inefficient cab regulations.

Far from being a problem, being “unregulated” has allowed Uber to thrive and innovate where traditional taxi services have achieved only stagnation and mediocrity. This success is probably why 100 percent of the spending on taxi and ride-sharing services done by the Sanders campaign is on Uber.

  • Corey Iacono is a Master of Business graduate student at the University of Rhode Island with a bachelor's degree in Pharmaceutical Science and a minor in Economics.