Surge pricing and political ignorance [Updated with some additional points on "fairness"-based motivations for opposing surge pricing]

|The Volokh Conspiracy |

Tonight is New Year's Eve, and demand for taxi and car transportation services is likely to be a lot higher than usual. As a result, Uber and other similar businesses will probably implement "surge pricing," which in turn will lead to protests by irate customers. Economists across the political spectrum tend to support surge pricing. As Tim Lee noted in a Washington Post article last year, "[t]he concept of charging extra during periods of high demand is a good one, since it attracts more drivers and ensures that customers who really need a car can get one." Paying extra for an Uber ride is a lot better than not getting one at all—the likely alternative in a situation where demand increases, but the number of drivers does not. It's also worth remembering that Uber drivers like to celebrate on New Year's Eve too, and they might not be willing to forego partying tonight without some extra incentive to do so.

Despite the strong economic rationale for surge pricing, the public tends to hate it, and many demand that government impose price controls to prevent Uber and its rivals from charging more for car rides at busy times. Some New York politicians have already proposed a ban on the practice, and the idea may well spread. Northwestern law professor John McGinnis suggests that political ignorance and irrationality are a major factor behind the widespread opposition to surge pricing:

Given that surge pricing provides such benefits, why it is under attack? Politicians think they can grandstand and appear to be champions of the little guy. But they can only do so because of public ignorance. There are two sources of public ignorance. One is rational…: People do not invest enough in time and effort in public policy because their vote won't make any difference to electoral outcomes and they have better uses of their time.

Another argument also seems to apply to surge pricing. [Economist] Bryan Caplan argues that people have irrational, systematic biases that they have few incentives to correct and one of them is to underestimate the benefits of the market, like surge pricing.

As I have discussed in my own work, the combination of rational ignorance and what Caplan calls "rational irrationality" do indeed often lead voters to support harmful policies. Public attitudes towards surge pricing is likely an example of this phenomenon. Most of the public is ignorant of basic economics, including the effects of price controls on the supply of goods. As a result, they don't understand the connection between higher prices and increased quantity and quality of car rides at busy times. To some extent, this is just plain rational ignorance. Most people don't find economics interesting for its own sake, and derive little instrumental benefit from learning about it. As a result, they don't understand the counterintuitive ways in which surge pricing benefits consumers.

There is also an element of Caplanian rational irrationality here: bias in the evaluation of information people do know. A person who is ignorant about economics should be relatively cautious in making judgments about economic issues, just as a person who knows very little about physics or biology should be cautious about making judgements in those fields. Yet many people have very strong views about the supposed evils of surge pricing, despite knowing little about the subject. That implies they aren't being very careful about controlling their biases and trying to be objective in their consideration of evidence. Unfortunately, such bias is very common when we consider political issues.

Despite the problem of ignorance, McGinnis predicts that public opposition to surge pricing will fade over time:

[O]ver time people can often be persuaded of the benefits of a practice if its good consequences become patent enough. In a world where new information technology allows us to make better use of underused resources, like empty passenger seats or spare rooms, and better allows us to estimate demand at different times and place, differential pricing will become accepted as the new normal.

I am somewhat less optimistic. I agree that people will be less opposed to surge pricing if its benefits become "patent enough." But I fear that is unlikely to happen, because, without at least a basic understanding of economics, consumers won't realize that surge pricing increases the quantity and quality of available goods. They will continue to believe the more intuitively plausible claim that it is just a nefarious plot by Uber's greedy owners to take advantage of consumers at a time when their need for quick service is unusually great. The public may see the surge pricing and the relatively swift availability of rides. But they won't necessarily understand the connection between the two. Many types of public ignorance about economic and political issues have persisted for decades with no sign of abating, and this case might turn out the same way.

If Uber surge pricing does become established over time, it is possible that people will come to accept it as "normal," and opposition may potentially diminish. That may be the reason why few people protest increased prices at hotels during peak vacation season, or increased prices for plane tickets at times when more people fly (though the relative lack of protest may also be because these price increases are less visible to consumers than Uber's practices). At some point, status quo bias might outweigh the effects of biases cutting the other way. But before Uber surge pricing can start to benefit from status quo bias, it has to survive long enough to begin to seem "normal." That may not happen if protestors get their way, and government forces the firm to abandon surge pricing before it becomes well-established.

UPDATE: Josh Blackman has a good post about a Houstonian who complains about surge pricing for an Uber car he took home from a football game without realizing that, absent the surge pricing, he would likely have been unable to get a ride at all:

A Houstonian complains that his 13-mile trip on Uber cost him $247.50 with surge pricing in effect. Yet, his own confused comments illustrate so lucidly how supply and demand work. In short, he couldn't find a taxi after a football game finished, he was tired of walking, so he hired an Uber knowing surge pricing was in effect….

I've been to football games at NRG (formerly Reliant) Stadium. After games, it is an absolute madhouse. I don't mean to be critical, but going to a football game, and expecting to take a taxi home is a really, really, really foolish idea. There are no cabs. You have options. You can drive yourself, and pay $50 for parking…

As it turns out, he couldn't get a taxi, because there weren't any. And because he was tired, and didn't feel like walking anymore, he called an Uber, and what do you know, it showed up!…

Supply and demand is a wonderful thing. If surge pricing wasn't in effect, there would not be any taxis, and this sports fan would have had to keep on walking.

As the football fan quoted by Josh put it, " "[The Uber driver] told us it would be at a higher rate because of the surge pricing … but we were tired of walking and looking for a ride so we accepted." In other words, paying the admittedly high surge price saved this man and his companions from the even worse alternatives of having to walk home, or spend a large amount of additional time looking for a cheaper ride. Yet he still rails against surge pricing, rather than realizing that it actually benefited him that night, relative to the options he and his friends would otherwise have had.

UPDATE #2: It could be argued that even people who understand the economic effects of surge pricing might still oppose it based on "fairness" considerations. For example, they might oppose it because they think higher prices benefit the rich at the expense of the poor. However, relatively high prices for any good might price out some of the poor, yet few of those opposing surge pricing favor universal price controls for all goods. Moreover, as Tim Lee notes, it seems very strange to oppose surge pricing on fairness grounds when the good being sold is one whose consumers are usually relatively affluent, whereas most Uber drivers (who get a cut of the higher prices) are not. More generally, surveys show that people who understand the economic effects of price controls tend to oppose them, even after controlling for ideology and other fairness-related attitudes. For example, as Paul Krugman notes, the overwhelmingly majority of economists (including left-wing economists like Krugman himself) oppose rent control.

Thus, much of the "fairness"-based opposition to surge pricing is likely to be caused by ignorance. The increased prices seem unfair in large part because, to a person who doesn't understand their economic function, they seem purely gratuitous efforts to benefit greedy producers at the expense of needy consumers. By contrast, even people who don't understand basic economics can readily understand the reason why, for example, auto manufacturers charge relatively higher prices for bigger and better cars. I don't doubt there are a few people who would favor banning surge pricing even if they fully understood the relevant economics. Similarly, there are people who favor wide-ranging price controls on goods and services across the economy. But, absent widespread public ignorance of economics, there would be far less opposition to surge pricing, even if it would not disappear completely.

UPDATE #3: I respond to Eric Posner's critique of this post here.