Computing the Social Value of Uber. (It's High.)

How much would be lost if Uber simply went away? That's actually happened in Austin, Texas, and the service has faced legal troubles in France, Spain, Germany and parts of India.

How much is really at stake? A new paper by Peter Cohen, Robert Hahn, Jonathan Hall, Steven Levitt (of “Freakonomics” fame) and Robert Metcalfe comes up with a pretty good, dollars-and-cents measure of how much UberX, the main Uber service, is improving the lives of its users.

Based on their study, here are a few ways of framing the value of Uber ride services to Americans:

For a typical dollar spent by consumers on UberX, they receive $1.60 worth of gain. 

That’s an unusually high amount of “consumer surplus,” as it is called by economists. It means there aren’t that many close substitutes for Uber at prevailing prices, as moving people around is something the U.S. does not do especially well.

UberX produces daily social value of about $18 million. 

That is comparable to having an excellent French impressionist painter produce a beautiful work each day and give it away for free. 

UberX produces about $6.8 billion in social value a year.

If distributed across every American, that would be over $20 in benefits for each.

Are those numbers a lot or a little? They’re not much compared to an $18 trillion gross domestic product, but they're probably a lot compared to other new companies. Either way, there is a more general point: If you consider those numbers to be small, then you don’t have to worry about the taxi drivers who lose from Uber.

In general, the more consumers gain from lower prices from a new service, the more competing suppliers lose. (The same trade-off holds with foreign trade or immigration.) So if you are worried about the losers from Uber, you also should believe the gains for users are high. Alternatively, if you rave about the glories of Uber, consistency requires you to recognize larger distributional losses for competitors. 

You might think that an economy can absorb progress only so rapidly, but since American rates of productivity growth have been low, it's difficult for this economist to see a strong case for keeping Uber out of transportation markets.  Insofar as we should do something to help taxi drivers, that is best accomplished by general benefit and retraining policies for the unemployed, not by restricting innovation.

The researchers used an ingenious method for calculating the user benefits. Uber calculates figures for surge pricing at times of high demand, but it rounds off. So a computation of market conditions that might lead to a surge price that is 1.249 times higher than normal fares is rounded down to 1.2, but 1.251 would be rounded up to 1.3. Yet the initial, unrounded 1.249 and 1.251 estimates represent almost the same underlying market tightness.

Using data from Uber, the authors therefore could see how the demand for Uber varied with surge prices that vary (say from 20 percent to 30 percent above normal fares) even when market conditions are roughly constant. 

If anything, this method underestimates the worth of Uber, as it doesn’t capture what economists call “option value.” Let’s say you walk home with a guy or gal late at night, hoping something nice will happen. But you’re not quite sure, as he or she might make the wrong noises about a particular political candidate, and then you would wish to bail out quickly. Uber would be the safety net. Most of the time you don’t end up using the service or recording a transaction that would count for this study, but you can start making plans because you know you have Uber as a fallback. 

Or consider those urban residents who have ditched their cars altogether. They know they can take Uber to the local market if they need to, even if most of the time they have not run out of milk and dog food. Similarly, the existence of Uber is helping some localities economize on mass transit expenditures.

The study also doesn’t measure how Uber might help get the U.S. to the next level of market innovation, which in this case might mean a network of on-demand, self-driving vehicles.

Going beyond the work of the authors of this study, it is possible to try to tease out a better estimate the future of Uber. Do these consumer gains mean that Uber will convince local governments to let it operate without major hindrance? Or will that consumer surplus attract more market entrants into ride-sharing, possibly even Google, thereby eroding Uber’s current dominance?

The real lesson here is an old one, namely that the fight between progress and protection never goes away. Progress is painful to some precisely because it is a big step forward for all the others.