India’s Price Ceiling on Uber Drivers - India’s New Regulation only Hurts Everyone?

Sumu Soohyung Jung

Report #1: India’s Price Ceiling on Uber Drivers

India’s New Regulation Only Hurts Everyone?

India is Uber’s second biggest market among countries where it operates. India’s government enacted legislation that allows major cities to arbitrarily limit how much ride service companies such as Uber can charge riders during peak times. I believe that the policy creates shortages for rides during peak times and is bad for the riders, drivers, and entire society. Misallocation of time, money, human capital and human potential will lead to tremendous amount of decrease in both consumer and producer surplus.

Before talking about the policy, we have to understand how does Uber assess fares. Uber’s fares are heavily based on a system called dynamic pricing. Dynamic pricing is based on estimated time and distance of the predicted route, estimated traffic, and the number of riders and drivers using Uber at a given moment. Dynamic pricing may cause fares to increase, which encourages more drivers to head where demand for rides is higher than drivers’ ability to make all the ride requests.

As surge pricing often results in fares above the new price ceilings set by the Indian government creates a supply-demand problem. According to Indian government, Uber needs to charge, “Rs 12.50 per kilometre for economy radio taxis, Rs 14 and 16 per kilometre for non-AC and AC black-and-yellow top taxis, and Rs 23 per kilometre for sedan radio taxis with an LCD board. In comparison, Uber used to charge a base fare of Rs 40, along with Rs 7 per kilometre and Rs 1 per minute for its hatchback UberGO” (Mashable, Joshi). The price ceiling imposed by Indian government simply breaches drivers’ inclination to work during peak times.

This graph shows an outage in Uber’s surge pricing mechanism on a busy night where the wait time became over fifteen minutes across the board (Chicagobooth, Nosko).[pic 1]

Drivers’ opportunity costs of going out and driving around are higher than the money they hope to make. This leads to less producer surplus because the driver is not producing the ride. It also leads to a decrease in consumer surplus because those who want rides and are willing to pay the higher prices cannot get rides. “[The] decrease in consumer and producer surplus leads to deadweight loss” (Forbes, Hartley), which is a loss to total surplus: economical inefficiency.