Market-Clearing Prices and India’s Price Ceiling On Uber Rides
There has been a constant debate around whether or not Uber prices in India, Uber’s second biggest market, should be limited during peak times. Over a year ago, India’s government decided to enact legislation that allowed major cities to limit surge pricing, which occurs when demand for Uber drivers is high. This resulted in supply-demand problems and a shortage in available rides during peak hours. Although those who were pro limiting this price believed that this legislation allowed cab drivers to maintain competitive fares, in reality, the legislation actually stopped Uber rides from reaching market-clearing prices. Normally, if the market-clearing prices were reached, more drivers would be willing to go out during peak hours as they would be properly compensated, and demand would coincide well with this supply since fewer riders would be willing to spend as much money on a ride.
The article linked below explains how this new Uber situation is comparable to the long lines that formed at gas stations in the 1970s when the United States government put a similar limitation on gasoline prices. This led to a shortage in supply, as consumers were buying more gasoline than was available due to the lower prices and the producers did not wish to sell as much gas because they were not allowed to do so at a high enough price to make a profit. Likewise, in India during peak times, due to the new ceiling on Uber prices, less Uber riders are incentivized to go out since the profit they would make is not worth it to them. Additionally, there is even higher demand from riders since more can afford the rides and are willing to spend money on them now that they have not reached market-clearing prices. Due to this lack of equilibrium between supply and demand, wait times are significantly higher for riders. The article makes the point that this increased wait time plays a role in holding India’s economy back, as each citizen’s utility is no longer maximized due to this additional time wasted in commutes.
In class, we discussed the importance of market-clearing prices as it creates an equilibrium between buyers and sellers and ensures that each seller is matched with a different buyer. This article brings another insight into the importance of allowing these market-clearing prices to be reached. Although it may not be “fair” that surge pricing only allows the wealthier and those willing to spend the money on rides to actually get rides, the surge pricing is vital to ensuring that there are even enough drivers to service the riders and that the wait time is kept low. Additionally, if wait time is kept to a minimum, India’s full potential can be better reached as fewer citizens are wasting time in longer commutes.
Source: https://www.forbes.com/sites/jonhartley/2016/05/31/indias-price-ceiling-on-uber-rides-hurts-riders-drivers-and-the-economy/2/#6669cbc97c8b