How does the ban on surge pricing affect the companies, customers and the economy?

Question

Recently, there has been a ban on surge pricing in two of India's busiest cities, namely Delhi and Bangalore.

I understand that surge pricing is a method to maintain the balance between the supply and demand. So, it's ban would affect the taxi aggregator companies.

However, is it really doing benefit to the consumer, as the Govt. claims?

Overall, how does the ban on surge pricing affects the taxi aggregator companies, the consumers and the economy as a whole?

I have read through articles this this, however, they give a very naive explanation. So, I'm looking for something clearer from a microeconomics point of view.

PS: Delhi has an odd-even rule too (for combating excessive traffic and pollution), which means that cars with an even (registration)number [the one on the number plate] are only allowed in the even dates, and the ones with an odd number o the odd dates. For example, if I am DL 23 BK 1900, I am only allowed on the road on even days, and not in odd days.

Answer 1

It depends.

If customers are currently making informed decisions when they book a surge-priced car, then banning surge pricing punishes customers, drivers, intermediaries, and the wider economy. It deliberately introduces an economic inefficiency.

If, however, a lot of customers are making uninformed decisions and are effectively being conned by surge pricing that they didn't expect or didn't understand, then banning surge pricing stops economically inefficient activity, protects consumers, and can be a net contributor to the economy.

Or if surge pricing increases negative externalities, then banning it could give a net benefit: for example, if the worst-polluting cars only come onto the road when surge pricing is available.

Answer 2

This is a difficult but important question:

a) At the heart of it is whether the markets are competitive or not. In competitive markets, prices reflect demand and supply so changing prices is the natural way that demand and supply are balances. You want many more cab drivers to come out in peak time, which only happens if you can reward them with a little extra when there;s scarcity. If you don't allow than then there will be rationing: low prices, but no supply, wait two hours for your next cheap cab.

b) But its hard to know if the market for taxis on May 1st, 2015 in Deli, in one particular street was competitive or not. Clearly, if you show you are desperate for a cab and the aggregator sees there's no other cabs around, then it has monopoly power. It should not be allowed to exercise that power and extract rents from you.

c) However, it will take many years before we figure out how to decide if the aggregator, at that place and moment, did have a monopoly and whether it did exploit it or not. Maybe that was the competitive price at that point. Maybe a dollar less in price would have attracted too many passengers. But maybe the person could just as well have taken a bike, a bus, or walked, and he or she was just lazy but doesn't want to pay for it.

d) Price gauging laws in many US states have rules that regulate price changes UNDER PARTICULAR CONDITIONS, such as a civil emergency, or the provision of a necessary good. There; also provisions against hoarding of necessary goods.