Uber and Economics – A Tale of Two Dollars

When you buy something, there are two forces at work. You, the buyer – how much do you want what you’re buying? And them, the seller – how much do they want in return? Economics is a science of how much, and Uber is no exception to the rules of economics.

Uber as a service doesn’t provide anything new to the economy. You could still get transport in a street vehicle before Uber – in a taxi. So what’s the big deal, why should we care at all about Uber? There is one thing that both ‘camps’ on Uber recognize: Uber lowers the cost, in dollars, to get a ride. But which dollar are we talking about?

There are two dollars to look at: the dollar you pay to get a ride from Uber, and the dollar you get for giving a ride on behalf of Uber. Proponents of Uber a quick to note that Uber makes transportation cheaper, benefiting everybody. Detractors however, just see lower prices as suppressed wages, as Uber doesn’t actually provide a new service – just a marketplace. So on one hand, Uber makes it so that if you need a quick ride to catch, you can get it cheaper then you could from a Taxi. But on the other hand, if you plan to make being a taxi driver your job, Uber apparently makes you earn less money (more on this down the page).

However this narrow view ignores the bigger picture of the Taxi market. Who are the other players, and what does Uber do different?

The Broken Barriers

To become a ‘Yellow Cab’ Taxi Driver you have to meet many requirements, possibly involving being fingerprinted.The first benefit of Uber and its lookalikes is the costs of drivers go out the window. No longer do you need to get any special certifications or any special vehicles to be a driver. This makes the whole process more, well, voluntary. Think about it, right now to become a taxi driver in San Francisco you need to meet many requirements including fingerprinting, taking a class and a test, paying a fee, and having no criminal history. This type of thing is what economists call Barriers to Entry. And barriers to entry in general increase costs and make markets less competitive.

Uber had the opportunity to blow the market open, and in some ways did. Although now you need a Commercial Drivers’ License to be a Uber driver, according to their site. However, Uber has been facing challenges from the government involving the issue of whether their drivers are employees and thus entitled to state-mandated benefits (Uber made a settlement to make this not the case).

As it turns out Uber is not blameless in all this either. They’ve been criticized for lowering prices, and for making a rather murky tip policy. So perhaps Uber isn’t all that great after all. Fortunately, there is a competitor, Lyft, which apparently avoids these issues.

So I propose a question, why do we need Uber anyway? I mean after all, there really are two parties in this transaction: the driver, or the seller, and the rider, or the buyer. If we have a buyer and seller, then why have Uber set the rates and take a cut?

In short, the answer is: to deal with The State. Soliciting your services as a driver on a regular basis without licensing is illegal, ie, the government has ‘allowed’ taxi companies to corner the market. This, however, is old news. Most cities have tight regulations on how many taxis there can be in a city and how much they can charge. Uber gets around these regulations by making them technically not cab drivers, though many cab companies are lobbying for this to be reversed to level the playing field.

The Two-Dollar Problem

So what does all this have to do with our two dollars? Well, as it turns out, uber both has on average lower fares and pays higher ‘wages’, even accounting for fuel costs …so what gives? How can Uber get less in and more out?

The solution to our two-dollar problem is to make a fundamental change in our thinking: it’s the same dollar. The difference is where that dollar is going. There are some cities where the Uber prices and the Taxi prices are at rough parity, yet even there the Uber drivers are on average pulling in more money. Where is our single dollar going? The people who actually own the taxis of course.

As I touched on earlier, cities keep a very tight grip on the taxi industry. Thus, taxi ‘medallions’, the limited-supply license to becoming a cabby are sold at very high prices by the city to corporate cronies who have the cash to fork out millions of dollars to buy them. This, er… ‘arrangement’ benefits precisely two parties: the government and the big taxi companies. The government earns cash by virtue of its taxi legislation and the ‘Big Taxi’ cronies earn cash by virtue of owning these taxi medallions.

Who loses? We do. The riders pay more, the drivers get less. Meanwhile the same corporate cronies who benefit lobby against Uber because it has found a niche loophole exempting it from the long-standing Taxi Oligopoly.

But still we don’t have the full picture. Why is Uber so great and why to people love it? To find out, we’ll have to go back and look at the unseen costs.

The Unseen Costs

Who owns those yellow taxicabs? Most of them are owned by some company, which then leases them out to the cab drivers. Who owns Uber taxis? The people do. You do.The critical difference is that Uber drivers own their own cars.

This fundamental difference in business model is what makes Uber great. Before, to become a taxi driver you needed a special taxi cab. Now you can just use your own car. Why exactly is this important? Simple: We’ve reduced the real cost of becoming a taxi driver. Sure, they’re still the same cars, burning the same fuel, and being manned by the same drivers… and yet, something is different.

Opportunity Cost is an economic term for what you give up by doing something. If you get a pizza at pizza hut, you’re forgoing a pizza at domino’s, or a burger at burger king, etc. To turn an Economic Profit, you must be making more than your real costs and your opportunity costs. So if you’re running a burger joint but are making less money than you would as a pizzeria you are losing money, even if your business is turning accounting profit.

So, sure, to be an Uber taxi you still need a car just like a normal Taxi, but your opportunity cost is lower: you don’t pay for the car because it’s your car. You can still use it to go to the store, pick up your kids, or to drive across the nation. The only real cost is your time and fuel, because if you weren’t an Uber driver, you’d probably still have a car.

In other words, Uber has made the Taxi Market more efficient. We get more rides from the same number of cards and for less money. The only losers are the people who have been leeching off the inefficiency: the city and its corporate cronies.

What it All Means

It means we’re asking the wrong question. The question is not to Uber or not to Uber, but the question is rather: to regulate or not to regulate?

After all, that’s what got us here in the first place. Uber is only a novel thing precisely because it blows past the antiquated Taxi regulations regarding who can be a driver. If Uber had to play by the old rules, it would be finished – irrelevant.

To answer the question, we have to ask another question. What has Uber given us? Uber has allowed more people to earn more money using only their car: this benefits people who need extra income or people who are in between jobs especially – people who can’t afford the time investment to become a full-on cabby. The riders benefit too. We get cheaper rides, which means we get to spend more money at our destinations and it allows us to travel more frequently.

I for one hope Uber is here to stay.

The external links presented in this article are for your further reading and are not fully representative of the original research that went into the article. If you have information which contradicts facts in my article, feel free to comment below and I will amend the article while giving you credit. Thank you for reading.

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