Recently, an explosion in New York City’s Chelsea neighborhood injured 29 people, causing widespread panic. The blast was caused by a pressure cooker bomb placed in a trashcan at the corner of 23rd and 6th.
Within the hour after the bomb went off, Uber turned off surge pricing in the explosion area. Doing so served as a response to previous public uproars against the company for maintaining the implantation of surge pricing for people in danger. In doing so, Uber was abiding by a previous agreement with the state of New York to cap surge pricing during emergencies and natural disasters.
At first glance, this seems like a good policy — people shouldn’t have to spend a fortune to flee a dangerous situation. On a deeper level, it feels morally wrong to take advantage of the desperate need of those fleeing a situation in the form of charging them more money for the safety of escape. This argument, however, ignores basic economic theory.
Uber drivers are independent contractors with full control over when and where they drive. Like any rational human being, they have two primary concerns at the wheel: safety and profit. Naturally, drivers will flock to the neighborhoods where surge is highest to maximize their earnings, and in turn, profits.
As everyone knows, when the demand for a good (in this case, a service) goes up, holding everything else constant, the price of that good also goes up. So, when consumer demand for rides goes up (in the form of a rightward shift in the demand curve), which is what happened during the Chelsea bombing, prices should increase.
“Surge prices” are simply the result of the supply of drivers and the demand for rides throughout an area. And though they may seem immoral, surge prices actually signal the creation of a new equilibrium, an equilibrium by which the supply of drivers can meet the demand for rides, and consumer utility can be maximized.
While this formula may sound soulless and mathematical, the reality is that when people are in danger, that equilibrium can save lives by getting more drivers to the danger zone.
People will not be able to find rides without surge pricing (Source: In Defense of Uber)
By turning off surge pricing, Uber drivers have no incentive to go to Chelsea over any other neighborhood, because the prices there are the same as they are everywhere else. The beauty of surge prices is that they signal to drivers that they should go to a certain area as soon as people in that area begin to request rides en masse.
This is exactly what would’ve happened if Uber had kept surge pricing in place on the night of the Chelsea bombing. If we prioritized the safety of our citizens, we would encourage Uber to maintain its implementation of surge pricing to get drivers to the neighborhood as soon as possible.
As Russ Roberts, the host of the EconTalks podcast writes, surge pricing is a signal to “potential passengers whose desire for a ride was not urgent to step aside and make room for those whose need was very urgent indeed.” Surge pricing deters people who are not in danger from calling a ride, thereby increasing supply for people in desperate need of one.
What if there had been active shooters or other bombs in the area? We should do everything we can to get people out of Chelsea safety, even if it means people in danger have to pay more. To maintain its image as a consumer conscious company that benefits local economies, Uber should realize the widespread benefits of surge pricing and forfeit its 30% revenue split to incentivize drivers to help citizens in need.
In turn, Uber would improve relationships with local governments, demonstrate corporate consciousness and build customer loyalty. It’s a tremendous opportunity for Uber to prove its worth to cities like Austin, Texas that have tense relationships with the company.
Without this policy change, drivers will be limited to imperfect knowledge of the consumer demand for rides in different areas of the city. While on any normal night, all this means is that someone outside a bar might have to wait a few extra minutes for a ride, on the night of a bombing, or a mass shooting, it may just mean the difference between life and death for someone fleeing the scene of the crime.
Without surge pricing, Uber’s resources will go to riders across the city at random — more than a simple resource misallocation in the event of a terrorist attack.
It’s time for Uber to collaborate with local governments to educate citizens about the life-saving benefits of surge pricing and give their 30% stake back to the drivers during rare moments of peril. As Uber’s influence grows stronger, the long term benefits of taking a pay cut far outweigh the temporary drawbacks.
Let’s prioritize the safety of our citizens and encourage surge pricing, ensuring that everybody who needs a ride can find one quickly.
Special thanks to Zander Nethercutt for editing this post and refining the nuances of economic theory included in this piece. So helpful! 🙏
Let’s chat! I tweet obsessively at @david_perell and will probably respond within 30 seconds 😎
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