It’s time to pull all these threads together and return to the debate about whether the government should allow ride-sharing companies like Uber to operate. You’ll see that the tools you’ve developed in this chapter provide a powerful lens for analyzing public policies.
The first stage of our analysis involves positive analysis, asking: What is going to happen when we ban or when we allow Uber? That means analyzing what’ll happen to the employment and wages of both taxi drivers and of Uber drivers; assessing whether Uber has increased the total quantity of rides; evaluating how much people have to pay for a ride; and accounting for nonfinancial costs and benefits such as whether Uber has reduced the typical wait time to get a ride home. Careful analysis has found that wages and employment of taxi drivers have fallen; employment of Uber drivers has risen, and they enjoy more flexible work hours. The overall number of rides has risen, and wait times have fallen. Your positive analysis tells you who gains from ride-sharing (Uber drivers and their customers), and who loses (taxi drivers), and by how much.
Balancing these competing interests requires a normative analysis, which assesses which is the better outcome and what policy the government should adopt. You might start by asking whether economic surplus increased. You know the quantity of rides went up, but in order to assess whether total economic surplus rose or fell, you’ll need to know why. The answer is that market failure, government failure, and technological change have all played a role in this rapidly shifting market.
Let’s start with market failure. When taxis first started out, passengers didn’t know whether their driver would be safe or reckless. Government responded by regulating taxis to ensure that only qualified drivers could offer rides. That made taxi licenses valuable.
That sparked a form of government failure. Here’s the problem: Existing taxis earn more when they face fewer competitors. And so taxi owners pressured the government to prevent new taxi drivers and new taxi companies from entering the market. Government officials relented, restricting the supply of taxis. This artificial restriction on supply led the quantity of rides to be less than the efficient quantity, creating deadweight loss.
Sometimes market forces work to undo the inefficiencies created by government failure. In this case, that’s what Uber did. It’s not technically a taxi company, and so it found a way to skirt these regulations. As a result, the entry of Uber increased the quantity of rides toward the efficient quantity, thereby raising economic surplus. Of course, Uber also adds congestion on the road, so it’s possible that there are now too many rides! In that case, economic surplus would be higher with some limitations on Uber.
Technological change also played an important role as ride-sharing apps provide efficient routing using GPS, they allow drivers to use a car that might otherwise sit in their driveway, and they permit drivers to flexibly schedule their shifts for when their opportunity costs are lowest. These changes all reduce the marginal cost of producing a ride. Lower marginal costs lead to a rise in the efficient quantity of rides. If there were no increase in the quantity supplied, this would have led to an even larger gap between the actual quantity and the efficient quantity of rides, creating even more deadweight loss.
All told, Uber likely increased the total amount of economic surplus and that’s why many economists tend to view ride-sharing as a good outcome. However, economic surplus doesn’t have to be your only criteria in a normative analysis. You might have concern about distributional effects of Uber or concerns about the fairness of undercutting the full-time profession of taxi drivers. Ultimately, your opinion will depend on how you value the gains to the winners relative to the losses for the losers. While reasonable people might bring different values to this discussion, weighing these costs and benefits differently, your analysis of economic surplus provides you with an important tool with which to begin crafting your view.