clock menu more-arrow no yes mobile

Filed under:

5 reasons everyone should love surge pricing

Uber CEO Travis Kalanick
Uber CEO Travis Kalanick
Stephen Lovekin/Getty Images for

If you get a ride from Uber or Lyft on New Year's Eve, you're almost certainly going to pay a lot more than standard rates. Uber has been known to charge as much as eight times the usual fare during peak periods. Lyft, which normally caps fare hikes at twice the standard fare, has announced plans to allow fares to rise to five times the normal rate on New Year's Eve.

People hate surge pricing. When I spent a week as a Lyft driver, I had several passengers tell me they chose Lyft specifically because they resented Uber's larger and more frequent price hikes.

But while no one likes paying higher prices, surge pricing is actually a good thing — for both passengers and drivers. Here's why.

1) Surge pricing gets more drivers on the road

(Justin Sullivan/Getty Images)

It might seem like an obvious point, but it's often overlooked by people who complain about surge pricing. Surge pricing gives drivers an incentive to spend more time on the road than they otherwise would. It encourages them to re-arrange their schedules to make sure they're available on nights of peak demand. And it entices drivers who might otherwise like to go out partying themselves on New Year's Eve to hit the road instead.

I haven't been able to find any hard data on how much higher prices increase the number of drivers on the road — a measure economists call the elasticity of supply. But there's reason to believe that big price increases will be more powerful during nights of predictably high demand — like Halloween or New Year's Eve — than at other times.

If demand spikes unexpectedly, there might be a limit to the number of people who can immediately jump in their cars and help out. But everyone knows New Year's Eve is the biggest night of the year for taxi service. Lyft has been sending me emails all week reminding me that I could make a lot of extra money if I drive tonight. So people who need some extra money have plenty of time to make the necessary arrangements.

2) Surge pricing gets passengers to use rides more efficiently

If Uber and Lyft charged the same rates on New Year's Eve as they did on a typical night, the result would be people facing long waits to get home. Indeed, that's how things worked in major cities in the pre-Uber world: when you tried to take a cab home from your post-New-Year's bash, you'd find that all available cars were taken. Surge pricing addresses this problem by setting prices high enough to bring supply and demand in balance, ensuring that you can always get a ride if you're willing to pay enough.

To some extent, this means that richer people get rides and poorer people don't. But that's not the only factor affecting peoples' willingness to pay. For example, some people have an inconvenient-but-doable option to get home — a 30-minute walk, say, or a bus ride — while others' only option to get where they're going is by taxi. At the margins, surge pricing will cause people who can get home some other way to do so, reserving the taxi rides for people who don't have alternatives.

Surge pricing also encourages carpooling — while a lone rider might not be willing to pay four times the normal rate, a group of three friends going to the same neighborhood might be willing to pony up. Again, this economizes on scarce rides.

3) Surge pricing redistributes wealth from rich to poor

Uber CEO Travis Kalanick has defended the company's surge pricing strategy. (Barry Chin/The Boston Globe)

When Uber and Lyft raise their fares, at least 80 percent of the extra money goes to the driver. And more likely than not, the driver needs the money more than the passenger does.

That's especially true on New Year's Eve. People who are struggling to make ends meet probably don't have a lot of extra cash to spend taking taxi rides to and from New Year's Eve parties. And people who choose to give up their New Year's Eve to drive other people around probably aren't wealthy. So if you find yourself with a $100 Uber bill tonight, think of it as a way of reducing inequality.

4) No one is forced to pay surge prices

(Justin Sullivan/Getty Images)

In the days before Uber and Lyft came along, someone wanting to get home from a New Year's party had two options: they could walk or take transit home, or they could wait — possibly for a long time — for a taxi to show up.

Those same options exist today. Taxi fares are fixed by law in most places, so taking a taxi costs the same amount on New Year's Eve as it does any other night. But just like in the pre-Uber world, you might have to wait for a long time before you're able to flag down a cab on New Year's Eve.

Uber and Lyft provide you with a third option that didn't exist before. If you're willing to pay extra, you can get a ride home more quickly. But it's just that — an option. No one is forcing you to take it.

Indeed, by expanding the total number of drivers on the road, Uber and Lyft may actually be reducing the average time that traditional taxi customers have to wait for a cab, because everyone who takes an Uber or Lyft car isn't competing for a scarce seat in a taxicab. (On the other hand, surge pricing may convince some traditional cab drivers to drive for Uber or Lyft that night instead, so it might be a wash.)

5) Surge pricing ensures rides are available in emergencies

(Kevin C. Cox/Getty Images)

This isn't so important on New Year's Eve, but another benefit of surge pricing is that it guarantees that a ride will always be available to people who really need one. There are certain situations — a medical emergency, say, or being late for a flight or a job interview — when even non-wealthy people will be willing to pay a big premium for a guaranteed ride.

In the traditional flat-fee model of the taxi industry, someone who happens to need a ride during a period when drivers are scarce might just be out of luck. No matter how badly you might need a ride, you have to get in line with everyone else. Variable pricing practically ensures this will never happen. You might have to pay extra, but you can always get a ride if you really need one.

One benefit of this is that it makes it a little easier for families to give up owning a car. Suppose you take a bus or the subway to work, but you're worried that giving up your car will mean you could be stranded in an emergency. Services like Uber and Lyft give people in this situation peace of mind, making it easier to choose a more affordable and environmentally friendly car-free lifestyle.

Sign up for the newsletter Today, Explained

Understand the world with a daily explainer plus the most compelling stories of the day.