You may have heard: on Monday, Toronto experienced a pretty heavy downpour. Three inches of rain — the amount that the city normally experiences in a month — fell in the space of about two hours. Given it wasn’t built to operate underwater, much of the city’s transportation system shut down: the subway stopped running, and many of the roads and highways ended up closed, too. People didn’t just get wet.
They got stuck.
It’s at this point in the story that Uber, the car sharing service, entered the picture from stage left. It did what it always does it situations like this — it enacted “surge pricing”. What does this mean? During periods of high demand, the company overrides the fixed price you pay for a black limousine, and instead lets the price float. I’d be shocked if Uber didn’t make more money when it does this, but there’s another, even more compelling reason for it to do so: surge pricing ensures that supply and demand for vehicles reaches what is called equilibrium. This mechanism is one of the cornerstones of economics: by increasing the price, supply increases (it’s more lucrative to drive, so more drivers do just that) and demand decreases (it’s more expensive to ride in an Uber car, so less people ride). Eventually, the market ends up at a place where the number of drivers matches the number of people wanting cars.
Most people seem OK with the price going up on a Friday night because everyone wants to go out partying in a black car. But when surge pricing is instituted because of a natural disaster… well, the tide of public opinion turns pretty fast. It has happened before, and, in Toronto on Monday, it happened again. One reaction in particular floated to the surface: Toronto entrepreneur Aron Solomon called (or at least strongly implied) that Uber were “assholes”, imploring startups not to be like them. He also hailed another company — Hailo — as being the gold standard of how to act in such a situation.
But here’s the thing: while I understand why he said it, I’m not sure I agree.
And to explain why, I want to introduce you to Harry and Sally.
Monday was a pretty regular day for Harry. He’d heard that a big storm was about to hit Toronto, but he was hoping the weatherman was wrong — as all good Canadians do, he had ice hockey training on after work, and he was looking forward to it. He snuck out of work a bit early to get home and grab his stuff… but sure enough, 5pm came around, and the heavens opened. Just before he was meant to leave for training, it started to become clear this wasn’t a regular storm. He got a call from one of his teammates; the hockey arena was closed due to leaking from the roof. Harry was disappointed, but he didn’t want to be deterred from catching up with his buddies; why don’t they go see a movie instead? It’d be an adventure to brave these elements. And isn’t Pacific Rim playing already? A few of his friends had cars and were going to drive, but Harry didn’t and needed to catch the subway… which he just saw on TV had been closed. No matter — he’d get a cab instead. He looked at his watch. 5.45pm. “I’ll be there in 15 minutes!” he said, before looking up a taxi on his phone.
Sally hadn’t slept particularly well on Sunday night. She woke up late on Monday, and everything was a rush. She managed to help get the kids organized before they jumped in the car with her husband — promising that she’d try to see them at swim practice that evening. Once she saw them off, she walked the couple of blocks to the subway to get to work. The day was going just fine; like Harry, she too had heard about the storm, and was annoyed at the prospect of getting wet on the way home. But what could she do about it? 5.40pm rolled around, and the phone rang. It was call from her husband, and it was clear from the tone of his voice something was wrong. The rain had trapped his car in the underground carpark. He knew that the subway was out, but he’d heard that the roads on Sally’s side of the city were passable — could she get a taxi and go pick them up? Sally felt a pang of anxiety in her stomach — would she be able to get to them? She didn’t want them stuck at the pool in a storm like this. The time was 5.45pm — and they finished swimming at 6pm. She grabbed her smartphone to see whether she could find a cab to get to them in time.
At any moment in a big city, a vast numbers of these decisions are going on at once. The trick? Deciding who gets what. Ideally, there’d be someone who knew everything about the world, and who could make just and equitable decisions for us. Who was going to derive the greatest benefit from the use of the resources? Unfortunately, we haven’t got a resource allocation system that works like that. But we do have another mechanism for allocating resources that works pretty well. Like democracy, it’s not perfect, but it just so happens to be better than anything else mankind has ever devised.
That mechanism is called price.
Unfortunately, price has quirks. One of those quirks is that during any period where supply and demand aren’t in balance, price can fluctuate pretty dramatically. In the instance of Uber cars, this happens on Friday night. But it also happens during natural disasters.
The question then becomes: during these times, is price still a useful way to decide who gets what?
Well, let’s go back to Harry and Sally. When they were both reaching for their smartphone to find a taxi at 5.45pm in Toronto during the storm, it happens that there was just one free taxi in the neighborhood they both were in.
How do you think it should be decided who gets it?
Harry was looking forward to seeing the movie with his friends, but I’m pretty confident that if you explained to him Sally’s circumstances — that she had a knot in her stomach about her kids, who were stuck at the pool in this huge storm — well, Harry’s a good guy. He’d let Sally take the taxi.
But there’s an obvious problem with that. When you book a cab, you don’t get to explain to the operator why you want the cab. The operator isn’t triaging. Instead, if demand exceeds supply, the cab gets allocated based on who gets in first. If Sally ordered the cab first, she’d get it, and she’d get to her kids. But for arguments sake, let’s say that Sally’s cell network was congested and Harry’s call went through first. In that case, Harry was off to the movies. And Sally’s kids? Well, they were going to be at the pool for who knows how much longer without any parents to collect them.
At the very least, I hope there’s a question in your mind around whether this resource allocation process is the best one. Sally is worried sick, and while she can’t explain to a taxi operator that she really needs this car right now, there is one way we could adjust the process to let her indicate to that it’s really important she gets a car.
That is: the amount she is willing to pay.
And that’s the difference between a world where the price changes in response to demand, and one where it doesn’t. Resources get allocated differently — the folks like Sally, who are willing to pay more because it’s more important to them, are able to get a car: in part because the people for whom it’s less important (like Harry) decide they’re not willing to pay so much to go to a movie. But it’s also because drivers who are faced with the prospect of driving their car in a much more dangerous environment than normal — like Toronto under three inches of water — are given a big incentive to jump in their car and go to work rather than just take the night off.
Yes, it sounds extremely distasteful to raise the price of a good or service when people need it more due to a natural disaster. And as a result, it’s pretty easy to score points by calling people names if they do it.
But you should understand the alternative that you’re advocating for if you take this path.
You are, in effect, saying two things: first, that a random allocation of goods or services is better than letting people decide for themselves how important it is to them. Chance decides who gets what. And second, that it is preferable to keep the supply of a good at the level it would be during a normal period (or even lowering it — who wants to drive in a storm?), as opposed to encouraging providers to increase the amount of the good or service. You won’t offer drivers more to get out on the roads, even though more cars are needed.
Fewer cars. Allocated by sheer luck. That’s the best approach?
“But it’s a natural disaster!” I can still hear you cry.
It sure is. But doesn’t that make it even more important to allocate resources effectively? When something bad happens like what happened in Toronto on Monday (or what happened in NYC with Sandy), there will always be a bunch of folks who have a big need to get somewhere. Should we really force them to compete with folks who just want to go to the movies? And isn’t it even more important to get more of those goods or services that are needed out into the community?
Let me reframe it in more concrete terms: in the immediate wake of Sandy, there was a reason that Uber was one of the few reliable ways for many folks to get around NYC.
I’m not an economist, and I don’t always agree with the conclusions that economists come to. But here’s what it boils down to for me: I hope that I don’t experience a natural disaster that shuts down the public transportation of the city I’m living in (and I hope it doesn’t happen to you, either).
But if it does happen, I hope I’m in a city that has Uber in it. Using their service under such a circumstance would cost. Probably a lot. But unlike soapboxes and righteous indignation, I’m confident it will actually get you somewhere.