Capital Ideas Blog The economics of Uber are very persuasive



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Capital Ideas Blog

The economics of Uber are very persuasive

By Robin Mordfin


September 30, 2014

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Uber, the ride service that dispatches rides to users via a smartphone app, announced yesterday that is has decided to use only licensed taxi drivers in Germany. In the 43 countries in which it operates, ordinary drivers in their own vehicles largely provide Uber’s rides. But in Germany the courts ruled that the company’s drivers do not comply with the nation’s transportation safety laws. 

Here in the United States, taxi drivers in New York, Chicago and other large metropolitan areas have protested the introduction of Uber as the company’s drivers are not required to pass costly licensing exams or purchase taxi medallions. Uber, and similar services such as Lyft, which offers rideshare opportunities, are changing the transportation landscape and the experts of the IGM Forum clearly believe that is a good thing.

With the proviso that such car services be obligated to meet the same safety and insurance requirements as taxis, nearly 100 percent of the panel members believe such services will raise consumer welfare.

“I don’t see any externalities. According to standard economics, competition enhances welfare and I believe that would be true here,” commented Harvard’s Oliver Hart. Also arguing in favor of such services from a purely economics point of view was Stanford’s Darrell Duffie, who noted that, “competition on quality and price helps consumers.”

Further, improvements for consumers were not just indicated in the area of pricing. Chicago Booth’s Austan Goolsbee pointed out that service improvements could also be expected from additional competition. “Yes, yes, a thousand times yes. Instead, try calling for a cab on Saturday night from the South Side of Chicago and see what happens,” he said.

Which is not to say that these experts do not see any potential problems. MIT’s Bengt Holmström worries that “foreigners, who tend to assume fares are regulated, can be taken advantage of without any price caps.” At the same time, Chicago’s Richard Thaler sees some hurdles that may need to be overcome by the companies themselves, “Uber needs to be careful about surging pricing in emergencies. People care about fairness as much as they care about efficiency,” he observed.



But with a unanimous view from some of the greatest economic minds, we consumers can likely look forward to improvements in car transportation services. Certainly, it is possible that such experts could make a mistake, but it is unlikely. As Yale’s Christopher Udry commented, “One can imagine circumstances in which this would not be true, but this is a situation in which the simple economics are very persuasive.”
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