Chicago plan to cap Uber, Lyft fares could lead to fewer rides

Chicago plan to cap Uber, Lyft fares could lead to fewer rides

A Chicago alderman wants to cap ride-share prices during peak demand. But price controls could leave more riders stranded if extra drivers are no longer attracted by extra cash.

Chicago Ald. Brendan Reilly, 42nd, introduced an ordinance May 26 to cap surge pricing by ride-sharing companies at 150% of normal fares during “peak demand” times.

Reilly’s ordinance is a response to constituent complaints about “paying small fortunes” for fares. He’s also worried ride-share companies are price fixing in light of “the obliteration of the taxicab industry.”

Added government is not the answer to every problem, especially when the marketplace can efficiently solve the problem on its own.

Instead of seeing prices as the enemy, prices should be seen as tools ride-sharing companies use to calibrate supply and demand. Prices send vital information about where the supply and demand of drivers and passengers is mismatched so algorithms can correct market inefficiencies.

High prices indicate high demand and low supply, and the ride-share market is facing unprecedented stress on both ends.

On the supply side, Uber, Lyft, and other ride-sharing companies are currently facing massive driver shortages across the country, meaning fewer drivers and cars to bring people from point A to point B. Because of the pandemic and social distancing, more economical options such as riders sharing the same trip have been removed with no return in sight. A lack of drivers and limiting rides to one or two passengers per trip has heavily restricted the supply of ride-share vehicles.

At the same time, as COVID vaccinations ramp up and the public becomes more comfortable with travel and return to city centers, demand for rides is increasing faster than the companies can keep up. Both of these circumstances have left riders feeling the price pain.

Dynamic or “surge” pricing is a tool that raises prices in times of peak demand in order to reduce demand and incentivize drivers to meet the needs of the “surge zone.” Maintaining this feature on top of unusual market pressures has driven prices to new highs, but that doesn’t mean the prices themselves should be capped.

Government intervention distorts these signals. Losing the incentive for drivers to drive to high demand areas during peak times will be reduced, leaving people stranded when they need rides most.

Capping the surge fare will also make it unclear which areas have higher demand beyond a certain point. Under the current system, one zone may have a 200% surcharge and another area a 300% surcharge. Under a cap, these areas would be indistinguishable in terms of where demand is higher because prices cannot match demand, again diminishing how many drivers respond to the surges and resulting in even fewer cars and longer wait times.

While no one likes the current high prices, as drivers get back behind the wheel fares should come back closer to pre-pandemic levels. That likely will happen faster than any government solution can be imposed.

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