Consumer and Producer Surplus – End of Chapter Problem
Uber has long been criticized for its use of surge pricing, setting prices based on current supply and demand factors, which, at times, results in a sudden and drastic increase in prices. In a Wall Street Journal article, the CEO of Uber was asked if we are seeing the end of surge pricing. His response: “at the end of the day, Friday night is three or five times bigger than a Sunday night in any city around the world. And if you’ve got enough supply on the system so that we were perfectly supplied on a Friday night for as much demand as a city could ever throw at us, then the rest of the week you have drivers not making a living.”
Without surge pricing, consumer surplus
With surge pricing, producer surplus
The correct answer and explanation is :
Answer:
- Without surge pricing, consumer surplus increases.
- With surge pricing, producer surplus increases.
Explanation:
Consumer and producer surplus are economic measures that help analyze market efficiency and distribution of benefits.
Consumer Surplus Without Surge Pricing
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Without surge pricing, fares remain constant, even during peak demand periods (e.g., Friday nights). This benefits riders because they pay a lower price than they would under surge pricing. More riders can afford Uber, increasing overall consumer surplus. However, the downside is that without higher prices, fewer drivers may be willing to work during high-demand periods, leading to longer wait times and reduced service availability.
Producer Surplus With Surge Pricing
Producer surplus is the difference between the price sellers receive and their minimum acceptable price. With surge pricing, Uber adjusts fares based on demand, increasing prices when demand exceeds supply. Higher fares incentivize more drivers to work during peak hours (such as Friday nights), increasing producer surplus. Drivers earn more for their time, making it more profitable to drive during high-demand periods.
Efficiency Considerations
Surge pricing helps allocate rides efficiently, ensuring those who value a ride the most can access one. While consumer surplus may decrease due to higher prices, the trade-off is better ride availability and reduced wait times. On the other hand, producers (drivers) gain higher earnings, making the job more attractive.
In summary, without surge pricing, consumers benefit from lower fares but face potential ride shortages. With surge pricing, drivers earn more, ensuring a better supply of available rides.