In the context of the article “America Would Happily Pay Uber An Extra $7 Billion”, how is consumer surplus generated when using Uber’s ride-hailing service, especially during surge pricing?
Answer
a. Consumer surplus is generated when the price paid for a ride is higher than what a consumer is willing to pay, resulting in a loss of value.
b. Consumer surplus is the difference between the highest price Uber can charge and the lowest price it can charge during normal demand periods.
c. Consumer surplus refers to the total amount of money Uber makes from consumers, including surge prices and base fares.
d. Consumer surplus occurs when the price paid for a ride is lower than what the consumer is willing to pay, allowing the consumer to gain additional value from the transaction.
The correct answer and explanation is:
The correct answer is:
d. Consumer surplus occurs when the price paid for a ride is lower than what the consumer is willing to pay, allowing the consumer to gain additional value from the transaction.
Explanation:
Consumer surplus refers to the economic benefit that consumers receive when they are able to purchase a good or service at a price lower than the maximum price they are willing to pay. In the case of Uber’s ride-hailing service, consumer surplus is generated when the price of the ride is less than the consumer’s perceived value of the service. This happens because consumers are willing to pay more than the fare they actually pay for the ride, which leads to a “surplus” or excess value.
For example, suppose a consumer values a ride from Point A to Point B at $20, but the actual fare charged is $15. The $5 difference is the consumer surplus, representing the additional value the consumer gains from using Uber at the price lower than their maximum willingness to pay.
During normal periods of demand, the pricing is generally lower, and more consumers can take advantage of this surplus. However, during surge pricing, the price of the ride increases due to high demand, which may result in a reduction in consumer surplus for some individuals. Consumers who still choose to use Uber during surge pricing are willing to pay higher amounts for the service, but the amount of surplus they receive is diminished, or in some cases, eliminated.
Despite this, surge pricing helps balance demand and supply, ensuring that drivers are compensated appropriately. It also provides an opportunity for Uber to capture more value when demand is high. However, the concept of consumer surplus is primarily about the value consumers receive when they pay less than their perceived maximum willingness to pay, which is why answer d is correct.