CHAPTER 7 Welfare and Efficiency

A photo shows a man accessing the Uber app on his mobile phone.

Ride-sharing changed more than just transportation.

If your parents are at all like mine, they probably warned you never to get in a stranger’s car. And they likely also warned you not to meet up with random strangers from the internet. Yet every time you open your Uber app, you literally summon strangers from the internet to get in their car. It shows just how much change Uber has wrought.

Talk to your driver, and you’ll discover that Uber has also created a whole new model of work. Drivers decide where and when they want to work, and for how long. They don’t answer to a boss, and they each provide their own workplace. But this freedom comes with a cost, as drivers aren’t covered by the federal laws that protect most other workers, including minimum-wage laws, unemployment insurance, and worker’s compensation.

Uber is also disruptive. It has led to a huge decline in business for taxi drivers. Existing taxi companies are finding it hard to recruit new drivers, and they’re losing customers hand over fist.

All of this has led to a fierce policy debate about whether Uber is a good thing. Not everyone is convinced that it is, and at various points, local governments in many countries have restricted or even outright banned the ride-sharing company.

It’s a debate in which economic arguments loom large. But how can we tell whether allowing rideshare services like Uber is good for a community? How do economists weigh the gains to riders against the cost to taxi drivers? Should we just trust that the market is delivering what people want?

This chapter introduces the tools of welfare economics, which you’ll use to assess how different outcomes affect economic well-being. We’ll start with an overview of how economists evaluate public policies. We’ll calculate economic surplus, and use this to assess the efficiency of markets. Then we’ll take a look at how markets can fail, and use these tools to assess the costs of market failure. Finally, we’ll join the debate about the appropriate role of economic efficiency in policy analysis.