July 13, 2014

UBER’S SURGE PRICING: A model only economists love:

New York just killed every economist’s favorite thing about Uber: surge pricing. Sure, many economists also love convenient car service at the touch of a button. But black-car services have been around for a long time. Explicit surge pricing — which both creates new supply and rations demand — has not, but it’s long been a core feature of Uber Technologies Inc.’s business model. While it can be annoying at times (during a recent rainstorm, I noticed a sudden epidemic of drivers canceling rides, which I suspect was due to the rapidly rising surge price), it also allows you to be sure that you will be able to get a taxi on New Year’s Eve or during a rainstorm as long as you’re willing to pay extra.

Sadly, no one else loves surge pricing as much as economists do. Instead of getting all excited about the subtle, elegant machinery of price discovery, people get all outraged about “price gouging.” No matter how earnestly economists and their fellow travelers explain that this is irrational madness — that price gouging actually makes everyone better off by ensuring greater supply and allocating the supply to (approximately) those with the greatest demand — the rest of the country continues to view marking up generators after a hurricane, or similar maneuvers, as a pretty serious moral crime.

That’s because humans’ moral sense is a product of the caveman era.