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India’s Price Ceiling On Uber Rides Hurts Riders, Drivers And The Economy

https://www.forbes.com/sites/jonhartley/2016/05/31/indias-price-ceiling-on-uber-rides-hurts-riders-drivers-and-the-economy/#ca20b892e0e6

This article relates to the topic of Market Clearing Prices discussed in class. This article dives into the effects on riders and driver of surge pricing and ceiling prices set by the Indian Government. As we discovered in class, the market is in equilibrium when there is a balance in supply and demand. Improperly setting prices either too high which leaves drivers with no rides, or too low which leaves riders with not enough drivers to fulfill the demand. This article mentions the price ceiling set by the government in India. In this case, the demand for rides increases as if the prices are cheaper (especially during peak hours), more people are going to choose Uber over local cabs. Now, the Uber drivers are going to make less money and therefore are less inclined to accept rides if they will not be allowed to set a price that is worth their time to do the rides. In the end, the drivers will still take the rides at the lower price because low-paying riders are still better than no riders. In the case that the price ceilings don’t exist, peak hours result in an extreme price surge (which the government is trying to combat with these price ceilings). However, if the rides cost too much money, the demand of riders is low, not giving enough potential business to the drivers. In the end, the demand will be low but if the prices are surged “enough,” drivers will still benefit.

To relate this article back to our learning thus far this semester, we can set up a Preferred Seller Graph to get a better idea of what this article discusses. In this case, the Preferred Sellers Graph has the sellers as all the Uber and local drivers in the area. The buyers are simply the customers looking for rides in the area. In class, we usually only looked at cases that had equal amount of buyers and sellers. In the real world, this probably is not the case, but we will continue to assume that assumption. Take the case of price ceiling during peak hours. In this case, the sellers can only increase their price so high. The buyers on the other hand will greatly benefit from this as during peak hours, their value on a ride is very high. Although in this case the riders greatly benefit from this price cap, the drivers are less inclined to deliver rides as they can only make x amount each ride. This creates a market imbalance that although Market Clearing Prices will definitely exist, the sellers are not content with the outcome. In the case of not having price ceilings, prices for rides now soar during peak times. In this case, the riders are going to have less of a “payoff” by choosing Uber as their mode of transportation. They can be inclined to look into other options at this point, maybe cabs or even other forms of public transportation. However, if the drivers set their prices at an appropriate price, market clearing prices can exist in their favor to maximize their amount of rides as well as profit. Another great example of market clearing prices in the history of the United States in 1970s when the U.S. government put a price ceiling on gasoline. In this case, this price cap limited the market from being market clearing between the buyers and sellers. In this case, since the price was so cheap, consumers were more inclined to purchase more gas than they really needed throwing off the supply-demand in the market. Overall, taking the topics learned in class about the importance of having a balance in supply and demand of a market extends far beyond “how much an advertiser values an Ad, or how much an incoming freshman values different dorms.”

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