Friday, February 28, 2014

Providing for the General Welfare: The Goal of Tax Reform

This article can be found at the Journal of Lutheran Ethics website.

Wednesday, February 26, 2014

The Problem with Uber

Uber is a taxi company that uses an app to hail their cars. The app makes for added convenience, but it also makes tracking demand for Uber taxis much easier. When the demand is high, Uber enables "surge pricing" which raises the cost of a ride when demand rises. This has gotten a lot of press recently and a lot of people have cried foul. Sometimes, rides can be four times as expensive as a normal rate ride. Surge pricing is not just based on the time, but also on location. So while Valentine's Day in NYC is likely a high demand day for taxis all over the city, a concert that just let out would result in a surge in only one geographic location.

Uber defends itself by pointing out that companies such as airlines and hotels have used surge pricing for years -- yet no one is complaining about them. They have a point. Industry-wide surge pricing increases efficiency -- it results in the most buyers and sellers making exchanges. This would work great with taxis as well.

Uber's drivers are able to decide if they want to put in extra hours or not. These drivers make more money when surge pricing is in effect. Therefore they are more likely to stay out on the road giving rides to people who need rides. Because more drivers will stay on the road to handle the demand, the difference between supply and demand will converge and the price gets lower. This really is the beauty of the market. If on one side of town a football game has just ended, the drivers from the sleepy side of town will move to the busy side to take advantage of the surge. So where football fans may have waited hours for a ride, they now have to wait less because more drivers have arrived.

So what's the problem? Surge pricing sounds great for everyone! And it would be. If there were ubers and not Uber.

For supply and demand in markets to work most efficiently, there need to be so many buyers and so many sellers that a single one of them alone cannot change price. This is the definition of a perfectly competitive market. The problem with Uber is that there aren't many different surge price-based taxi services competing for riders -- there is only one.

In Miami, there was serious debate in the county commission over allowing Uber in. I'm for it. But I think the best idea would be to postdate any legislation authorizing surge pricing-based services so that other companies have a time to set up and take advantage of the new market. Free market theory would assure us that they certainly would. If Uber is allowed a monopoly on surge pricing, however, there is no free market argument for it.

EDIT: Another article on Uber's surge pricing. At what point does surge pricing become gouging? "Uber Surge Pricing: There's a Mobile App for Price Gouging"

Friday, February 21, 2014

California Gets Carbon Tax Horribly Wrong

Unfortunately, I need to explain some economics before understanding why this California politician is clueless.

A market externality is a cost of a good or service that is not included in the price. For instance, I am a power plant and do not figure in the cost of acid rain when I burn coal to generate electricity (luckily we have ways to remove the sulfur from the emissions now, but think back to the 80s). The cost of the acid rain is the market externality.

A social cost or a social good is part of the market externality. In the example above, acid rain is a social cost. Since the cost of the acid rain isn't figured into the price, the difference is borne by everyone affected -- hence the social cost. A social good is similar, but a desired result. For instance, a well-educated population is a social good even for those who did not pay tuition.

A pigovian tax is a "tax" added to the price of a good or service which has an external component. Or think of it as having a social cost. The pigovian tax is meant to bring the price in line with the true price -- it attempts to internalize the externality. The result is two-fold: (1) the behavior causing a social cost is disincentivized, so less social cost and (2) the price now reflects the true price which increases market efficiency.

When it comes to carbon emissions, market externalities are the true problem. The actual cost of emitting carbon (via climate change mainly) is ignored. Gas is cheaper than its true price would be. It's impossible to know exactly what the true price would be, but that doesn't mean it doesn't exist. So the best way to solve carbon emissions that contribute to climate change is through a pigovian tax. More on this in the forthcoming issue of the Journal of Lutheran Ethics.

So when I saw an article about carbon tax in California I thought they were on the right track. But then I read the full headline: "California senate leader: Carbon tax would return revenue to poor, transit." A pigovian tax can't be treated like a sales tax or income tax. It can't simply be thrown into the revenue barrel and allowed to be porked out like the rest. The whole point of a pigovian tax is to bring the externality into the market and reduce social costs to equal or less than zero. Simply doling out this revenue to the poorest Californians does nothing to mitigate climate change. The proceeds should be used for the social goods that help neutralize carbon emissions. While I doubt California is interested in paying Brazil not to cut down the rainforest (a truly important measure to take), I think they would be interested in a research grant for tech companies to look into artificial carbon sinks. The revenue from this tax could help fund such a grant. While they also mention public transit, I just hope they do it the right way in order to reduce traffic instead of increase it. See David Owen's great books which cover, among other topics, induced traffic.