Advantages And Disadvantages Of Surge Pricing

In the last 4 years, surge pricing has become a common news topic due to the controversy caused by its use by Uber. The argument has been whether surge pricing is a disadvantage or advantage to consumers. When demand rises for a good (from Fig1 below, demand (D1) increases (D2)), the price must rise to bring the system back to equilibrium (P1 to P2) with a higher quantity supplied (Q1 to Q2). The higher cost is to encourage suppliers to meet the demand required by allocating more resources to the areas that are willing to pay the higher price P2. Hence, the higher price charged to consumers result in higher profits for firms. In this essay, I will be focusing on the effects of surge pricing and whether a ban would correct the disadvantages associated with it.

Governments introduce these bans in an attempt to correct the market failure of unequal distribution of incomes; where those on lower incomes get hit harder by the rise in the price. From an economist’s point of view, bans are a bad idea. They create a price ceiling below the equilibrium after the demand increase. The excess demand can cause queues so consumers pay in waiting time instead of higher prices. It can also lead to suppliers allocating the goods to their family and friends or can even lead to a black market where consumers buy up the market and sell at higher prices to earn a profit. This would be worse than no ban at all as it would hit those on lower incomes the same as no ban but would also not encourage a higher quantity of goods to be allocated to the