I take motorbike taxis to work most days here in Kigali. They are convenient, regularly roaming around the streets so you never have to wait long, they are fun, and they are cheap. A trip around town costs somewhere between 50p and £1, depending on how far you are going and what time of day it is. Which isn't bad compared to the £7 you can pay for a return tube trip in London if you forget your oyster card. It is so cheap I haven't bothered using my transport allowance (though perhaps I am under-pricing the small risk of accidents somewhat).
Most expats I speak to seem to worry about getting "ripped off" by paying a higher price than locals. As there is no set price or meter, you need to haggle. It isn't about the money (perhaps 20p), they say, but about the principle. And perhaps they are right. Perhaps they are all intuitive economists, who understand that it is their consumer surplus, and that the driver is engaging in price discrimination. "Consumer surplus" is the name in economic theory given to the gap between the maximum price that the buyer is willing to pay, and the minimum price that a seller is willing to accept. "Price discrimination" is where a seller tries to charge different prices to different customers (based on their ability to pay), in order to capture some of this surplus. Both phrases - consumer surplus, and price discrimination, suggest that maybe the expats are right to feel aggrieved at being conned out of their 20p. But does economic theory really tell us anything about the ethics of this situation?
For a concrete (and realistic) example, suppose the price for locals is about 50p, but the driver asks me for 70p. We are still a long way from the £2 it costs for that single tube trip in London (with the oyster card). Of the £1.50 consumer surplus, the taxi driver (who earns perhaps £2,000 a year at purchasing power parity - roughly the average income in Kigali*), is conning me out of 20p (13% of the surplus). I'm keeping £1.30 (87% of the surplus).
Is that really in any sense wrong? Or on the contrary am I wrong to keep so much of the surplus? Particularly given that the main reason I earn more than 10 times what the taxi driver does is not that I'm smarter or harder working, but that I was lucky enough to be born in a rich country not a poor one. What are the ethics of that?
Most expats I speak to seem to worry about getting "ripped off" by paying a higher price than locals. As there is no set price or meter, you need to haggle. It isn't about the money (perhaps 20p), they say, but about the principle. And perhaps they are right. Perhaps they are all intuitive economists, who understand that it is their consumer surplus, and that the driver is engaging in price discrimination. "Consumer surplus" is the name in economic theory given to the gap between the maximum price that the buyer is willing to pay, and the minimum price that a seller is willing to accept. "Price discrimination" is where a seller tries to charge different prices to different customers (based on their ability to pay), in order to capture some of this surplus. Both phrases - consumer surplus, and price discrimination, suggest that maybe the expats are right to feel aggrieved at being conned out of their 20p. But does economic theory really tell us anything about the ethics of this situation?
For a concrete (and realistic) example, suppose the price for locals is about 50p, but the driver asks me for 70p. We are still a long way from the £2 it costs for that single tube trip in London (with the oyster card). Of the £1.50 consumer surplus, the taxi driver (who earns perhaps £2,000 a year at purchasing power parity - roughly the average income in Kigali*), is conning me out of 20p (13% of the surplus). I'm keeping £1.30 (87% of the surplus).
Is that really in any sense wrong? Or on the contrary am I wrong to keep so much of the surplus? Particularly given that the main reason I earn more than 10 times what the taxi driver does is not that I'm smarter or harder working, but that I was lucky enough to be born in a rich country not a poor one. What are the ethics of that?
Of course haggling can be fun. I often make a mock protest at the price, and then just leave a big tip and round up to £1. Thirty pence seems pretty cheap for a very big grin.
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* Just realised that is average household income, so probably a substantial over-estimate of individual income.
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* Just realised that is average household income, so probably a substantial over-estimate of individual income.
9 comments:
I routinely bargain down taxi drivers etc to a price paid by locals but then give them the same as they asked for at the start. Unless they are arseholes. This makes me feel better about haggling them down (I have a habit of going too far I often discover after), makes them feel good because it is now viewed as a bonus for them, and as you say, they get a part of my consumer surplus. Quite frankly, I don't mind sharing it with them.
It is a little fiscal stimulus. BUT here is the rub (and here where I reveal how much I think about this sort of scenario too):
if there is no additional production in Kigali as a result of you paying more and no more imports - then you will push up prices a tiny bit for everyone and only that driver will have benefited - therefore you will have redistributed income and probably towards someone who is comparatively better off. If the driver imports something then it is a transfer directly from you to him and doesn't impact anyone else. If the driver spends it in Kigali and it stimulates production then several people including the driver benefit.
So... the impact depends on where you are in the business cycle, the behaviour of the driver and trade openness.
What will you do next time?
Thanks Simon. I would guess that the economy in Kigali has lots of spare capacity and that an increase in demand will stimulate new production, particularly with stable governance and macroeconomics. The world's tiniest stimulus? To the extent that he spends it on imports, much of the spending will go to transport costs - a mix of labour (good) and fuel (bad), and the goods will be coming from East Africa (good) or China (not the worst thing in the world).
To what extent can the overpaying change the entire market? Price discrimination seems relatively easy in this case since it can be done based simply on skin color or nationality, but does more people paying more change prices. It seems unlikely, but I wonder what impact this has on the average Rwandan rider. Maybe one of you smart economists already know the answer.
I'd expect that this could raise prices for other expats, but probably not for locals. There is enough spare capacity in the moto taxi industry (and reserve underemployed labour) that any price rise would be competed away.
Makes sense. Thanks Lee. On an aside. Riding on the back of motorcycles in Kigali with the rolling hills in the landscape was a true treat.
Thanks RB, I agree. Another way to think of the surplus is to include the increase in utility we get from paying more to someone who needs the money I.e has a higher marginal utility :)
does the blue-eyed tax come with any preferential treatment, though, like maybe being picked up instead of the other guy? in that case you're paying for an upgrade and shouldn't haggle.
Perhaps. In general there are plenty of taxis though and I don't think that this is a big issue (here, though it may well be in other places).
You should just do what gives you the most utility. Kindheartedness or hardnosedness, it's up to you. Just don't rob the guy. Oh, and wear a helmet.
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