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Chapter 5: Problem 7

An article in the Economist noted that Uber, the ride-hailing app, "is said to worsen traffic problems" and observed that the result is a negative externality. a. Explain the reasoning behind the argument that using Uber might generate a negative externality. b. If Uber generates a negative externality, should the government impose a tax on each ride? Should the government also tax rides in taxis? Should it tax rides in private cars? Briefly explain.

Short Answer

Expert verified
Uber might generate a negative externality by increasing traffic congestion. If this is the case, the government might impose a tax on each ride to reduce the number of trips and the associated external costs. Whether taxis and private cars should also be taxed depends on whether they contribute to these external effects.

Step by step solution

01

Understanding Externalities

Firstly, it's necessary to understand the concept of an externality. An externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit – they're external to the transaction. A negative externality is a cost that is incurred by someone who is not part of the transaction. In this case, if Uber causes more traffic, increased congestion is a cost incurred by people in the city.
02

Uber and Negative Externalities

To understand the argument that Uber might generate negative externalities, it must be considered that the business model of ride-hailing apps like Uber increases the number of car trips as people who might choose public transport, walking, or not traveling instead decide to order a car for their journey. This increased car usage can lead to increased traffic congestion, which is a cost that affects all city residents, not just those who are using Uber. This is the negative externality in question.
03

Government Intervention and Tax

If a negative externality is present, the government might intervene to try to correct this market failure. One common way to do this is with a tax. By imposing a tax on each ride, the government can raise the cost of using Uber, which might reduce the number of trips and thus reduce the negative externality. Whether the government should also tax rides in taxis or private cars depends on whether these also contribute to the externality. If they also increase traffic congestion, it could be argued that they should also be taxed.

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