Vital signs: Uber’s impact on traffic accidents is a lesson for calculating social benefits
Uber has been great for some people and bad for others.
This has been beneficial for its founders and investors. This has been beneficial for the bikers who got a new way to travel convenient and affordable. And this has been beneficial for some drivers who want flexible work.
On the other hand, taxi drivers are clearly the losers. Uber has seriously reduced the value of taxi “plates” and “medallions”. It has also undoubtedly contributed to the fall in the wages of some drivers.
How do you count Uber’s total social value? Or, for that matter, any other commercial or technological innovation? It’s a question raised by a new economics discussion paper finding that Uber has helped reduce drunk driving.
Uber’s economic advantage
Anyone who travels with Uber knows it’s a convenient service – so convenient that research suggests consumers would be willing to pay up to 60% more for it.
This was calculated in 2015 by five US economists in a National Bureau of Economic Research (NBER) rough draft. This all equates to US Uber users valuing the service at US $ 6.8 billion per year more than what they spent on it.
Such valuation is known as consumer surplus – the additional benefit a consumer gets on top of the price they pay for something.
Uber’s market capitalization (greater than80 billion dollars) reflects the surplus of its producer, that is, the benefit that the producer derives from the sale of something. Typically, this can be viewed as a profit, with market capitalization essentially being the present value of any expected future earnings.
Taking into account externalities
An introductory economics textbook will tell you that the sum of consumer surplus and producer surplus equals total benefit to society. This can be illustrated using a simplified supply and demand graph (as shown).
However, the field of welfare economics tells us when this simple arithmetic isn’t necessarily.
The First Fundamental Theorum of Welfare Economics – known as the First Welfare Theorem – sets out the conditions for Adam Smith’s aphorism that competition and the invisible hand of the market lead to the common good. .
A theorem is more than a theory. It is a mathematical truth. The first welfare theorem – the most famous result in all of economics – was formally proven for the first time in 1951 by Kenneth Arrow and Gerard Debreu.
He says the free market can maximize total societal well-being, but only on the basis of a few crucial assumptions. The first is that there are no “externalities”, that is, a transaction between a buyer and a seller does not affect anyone else.
For example, if I like Diet Coke, it probably doesn’t affect you. Why do you care what I drink? I’m just one person, so I can’t even affect you by increasing the price of my favorite drink.
But things are not always that simple. What if I had loud parties and played loud music until the early hours of the morning? It might be fun for me and my guests, but definitely not for my neighbors.
This is why “noise pollution” is prohibited. It is an externality. It requires regulatory intervention to be corrected. For the same reasons, economists advocate a price on carbon emissions, to correct what is wrong in the competitive market that allows greenhouse gas pollution.
Read more: Vital signs: a 3-point plan to reach net zero emissions by 2050
All this to say that we cannot always just look at market performance, or simply add up consumer and producer surpluses, to understand the social benefits of an innovation or a technology.
Uber’s positive externalities
Which brings us back to Uber.
Enter an interesting new working paper from NBER, Fatal accidents linked to Uber and alcohol, by economists Michael Anderson and Lucas Davis of the University of California at Berkeley.
The article begins with a plausible hypothesis: that some people before the advent of Uber might have chosen to drive their own cars and then come home drunk after a big night out. In many cases, Uber is cheaper and more convenient than taxis which were an option in such circumstances.
If that’s true, then Uber (and other convenient “ridesharing” services) will have reduced the incidence of drunk driving, and the resulting accidents and deaths. This would be an example of a positive externality – a benefit to third parties (or in this case the company).
Anderson and Lucas combined data from the National Highway Traffic Safety Administration’s Fatality Analysis Reporting System with proprietary data on Uber’s ridesharing activity. They then compared areas or greater and lesser Uber penetration, to help determine common trends, for example, safer motor vehicles or tighter traffic laws. They conclude:
our results imply that carpooling reduced the number of alcohol deaths in the United States by 6.1% and the total number of road fatalities in the United States by 4.0%.
They convert this into a monetary value using the conventional measure of so-called “statistical life value”. This leads to a profit of $ 2.3 billion to $ 5.4 billion per year, a significant value on top of Uber’s estimated consumer surplus.
Uber’s winners are therefore consumers, producers and society.
The markets are great. Except when they’re not. Negative externalities like pollution are an important reason for “no”. This is also why a really important role of government is to use political tools to internalize these externalities.
In the case of carpooling, governments must be attentive to those who lose from its advent. Indeed, in 2016 I proposed a compensation plan do just that for taxi license holders.
But sometimes there are positive externalities of technological innovations. The same logic that applies to the taxation of negative externalities tells us that we should subsidize positive externalities.
I’m not sure this happens with Uber rides. And, of course, without a carbon tax, carpooling still contributes to pollution externalities. So there are pros and cons in calculating “Uber’s social benefits”.
But Anderson and Davis convincingly demonstrate that positive externalities can be big and important, on their own.