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  • Uber Price Mechanism

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    Gupi Pal
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    The document discusses how surge pricing works in the taxi market. It begins in 2005 when taxis had fixed fares per mile and demand increased, which led to shortages. Now with Uber, surge pricing increases fares during high demand to incentivize more drivers. In the long run, new drivers enter to meet demand and prices fall. The government debates subsidizing fares to keep prices low while still incentivizing drivers. Uber deals with large numbers of riders, making demand predictions feasible despite individual unpredictability. When demand increases under fixed pricing, consumer surplus rises but producer surplus does not change. Allowing prices to rise would maximize total surplus. Regulating maximum prices creates a welfare loss triangle from not producing at the optimal

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    3. Uber Price Mechanism(1)

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    The document discusses how surge pricing works in the taxi market. It begins in 2005 when taxis had fixed fares per mile and demand increased, which led to shortages. Now with Uber, surge pricing increases fares during high demand to incentivize more drivers. In the long run, new drivers enter to meet demand and prices fall. The government debates subsidizing fares to keep prices low while still incentivizing drivers. Uber deals with large numbers of riders, making demand predictions feasible despite individual unpredictability. When demand increases under fixed pricing, consumer surplus rises but producer surplus does not change. Allowing prices to rise would maximize total surplus. Regulating maximum prices creates a welfare loss triangle from not producing at the optimal

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    2 views16 pages

    Uber Price Mechanism

    Uploaded by

    Gupi Pal
    The document discusses how surge pricing works in the taxi market. It begins in 2005 when taxis had fixed fares per mile and demand increased, which led to shortages. Now with Uber, surge pricing increases fares during high demand to incentivize more drivers. In the long run, new drivers enter to meet demand and prices fall. The government debates subsidizing fares to keep prices low while still incentivizing drivers. Uber deals with large numbers of riders, making demand predictions feasible despite individual unpredictability. When demand increases under fixed pricing, consumer surplus rises but producer surplus does not change. Allowing prices to rise would maximize total surplus. Regulating maximum prices creates a welfare loss triangle from not producing at the optimal

    Copyright:

    © All Rights Reserved
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    Flag for inappropriate content
    of 16

    LT: How does the price mechanism

    work in the Taxi market?


    DTC- Calculate the loss in
    consumer and producer surplus
    from regulating taxi fares through a
    maximum price per mile
    The year is 2005…
    • …Chaos reigns as there is no Uber
    • Taxi fares are set by a meter which charges a
    fixed constant rate per mile
    • Show what happens to quantity and price on a
    supply and demand diagram when demand
    increases e.g. as the club closes at 3am
    How have things changed?
    Uber Surge Pricing- Short-Run

    Ra

    e
    tiv
    tio

    en
    ni
    ng
    I nc
    Uber Surge Pricing- Long Run
    • Signal to taxis
    to enter the
    area
    • New taxis enter
    the market
    causing scarcity
    to disappear
    and the price to
    drop
    Should the government respond?
    • Surge prices make taxis unaffordable for
    poorer consumers
    • A ban on surge pricing would make it more
    affordable but would return to the old
    problem of shortages
    • A possible solution would be a subsidy
    (payment to firms) which would keep prices
    low for consumers whilst increasing the
    prices firms receive
    Could Uber predict demand?
    • Humans behave in irrational and
    unpredictable ways meaning it is hard to
    forecast their behaviour…
    • ...However, Uber are dealing with such large
    numbers of people that individual decisions
    do not make a big impact
    DTC- Calculate the loss in
    consumer and producer
    surplus from regulating taxi
    fares through a maximum
    price per mile
    What has
    happened to
    producer
    surplus after
    the increase
    in demand?
    Nothing has
    changed as the
    price hasn’t
    changed
    What has
    happened to
    consumer
    surplus after
    the increase
    in demand?
    Green area is
    the new
    consumer
    surplus- can’t
    go beyond Q1
    as supply
    doesn’t change
    If the price was
    allowed to rise
    then this
    would be the
    gain in
    producer
    surplus
    Green area is
    the new
    consumer
    surplus if price
    could rise
    Where is the loss in CS & PS (Welfare Loss)?

    • Green triangle =
    loss in consumer
    + producer
    p3
    surplus as we are
    not producing
    where at p3,q3

    q3

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