Why Surge Pricing Ban Is A Bad Move By Arvind Kejriwal

A collective sigh of relief must have escaped Delhi’s air on Monday, when Ola and Uber decided to suspend surge pricing after chief minister Arvind Kejriwal warned them of strict action including permit cancellation and impounding of vehicle.  While on paper it seems a prudent move, and makes the CM “the hero Gotham deserves, but not the one it needs right now”, it is in ground reality a very bad move. It is a sort of knee-jerk reaction to a situation, so that the outcome suits the current political setting of the ruling government. Now, before you declare me a bhakt, a Bhartiya Janta Party stooge, let me use simple economics and logic to break down this move and prove it unnecessary.

The two most basic fundamentals of any free market are demand and supply. Based on these two forces, prices rise or fall. Turn to any chapter of history, and this shall stand true. Ola and Uber’s price surge mechanism works on a similar formula. If the number of people hailing cabs in any particular area exceeds the number of cabs present in that area, prices increase. Simple demand supply forces at work. What stumps people most times is how prices surge 4-10 times of the original prices, when the three-wheeler auto charges the same during same time.

A simple explanation of this is the number of cabs present in the area versus the number of auto rickshaws present in the area. Think about it. An auto-rickshaw is much cheaper to buy, easier to operate and is readily available. It is a necessity in today’s times. A cab is expensive to buy, difficult to maintain and is not easily available. It is a comfort. Say, take the example of five star hotel versus other general hotels. Or coffee at airport versus the coffee at your next door coffee-shop. The difference in pricing reflects the other luxuries you are being provided.

A higher than normal price incentivizes the business owner to provide a better service. If you were a driver with Uber or Ola, would you drive at higher rate in peak hours or would you want to drive at normal rates irrespective of the peak hour situation?

Do you own a business, where you wish to make reasonable profit depending on the demand or a charity, where..well where nothing matters then? Gift away your taxi to the commuter as well.

Secondly, the ban on surge pricing also robs the city of investment from these app based taxi service providers. How? Well, both these companies invest huge amounts in training drivers, financing their needs for a cab and in cases also buying cars themselves to be run as cabs. The economic cycle created by them, however small, adds one spoke each at a time in this wheel. An absurd ban throws a spanner in this economic movement.

Thirdly, a ban on one of the companies’ policy, out of the blue, is what comes under ‘unreliable tax and policy regime’. Any global giant that wishes to invest in an emerging market expects free-market forces to decide the prices, the demand and supply. Government interventions, where not necessary, break investor confidence and they shy away from putting money into such markets then. The best example for such a market is any violence-torn nation, which has uncertain tax, policy and pricing decisions. Now, while a simple ban on surge pricing is not on such a scale, it will have its repercussions in due time.

Finally, it goes without saying that this move is laden with a political motive, that seeks to establish the odd-even scheme as a success in the second innings as well. The odd-even initiative is perhaps the best policy decision that the present Delhi government has come out with. While pollution levels remain a matter of debate, the roads are certainly less crowded and people now take out vehicles only if necessary. That stands necessary for personal vehicles. All commercial vehicles ply with the sole intent of making a living, a reasonable profit. If a ban stops them from moving about freely, what would be the incentive for them to provide a service to the consumer in the first place, let alone charging less or more?

Being a former revenue officer himself, the chief minister should be well aware of at least how revenue is generated and kept in movement. He seems to have forgotten that he is leading the nation’s capital, which is the projection of one the world’s fastest growing economies. Any and every decision that he takes will be a dent or a boost to investors. Public convenience and social welfare is, without a doubt, the most important goal for any government. But a social safety net cannot be built by cutting ropes from capital of investors.

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