Uber and Lyft: Fixing Their Mistakes

flickr_user_Dylan_Passmore_attribute

Alexandra Flegle-Honorbound

What happens when the objectives of a business come in conflict with government regulations? These government regulations create an opportunity cost that affects everyone in the slightest or largest ways possible. Opportunity cost means the next best alternative foregone when an economic decision is made. Opportunity cost entails having an incentive to buy or discard a good. Even today, companies like Uber and Lyft have to decide whether or not to support drivers in a city based on the city’s regulations. Firms work to maintain their best interests at hand even if it causes unemployment to others because firms strive to maximize their utility.

Within a market, everyone works to gain a higher utility. In everyday life, “the market aligns incentives in such a way that individuals work for their own best interest.”[I] Every firm or company has incentives to become the best firm possible causing them to have an opportunity cost for all of their actions. When firms act contrary to the objectives or their employees or independent contractors to attain a higher utility, the action causes problems for both the firm and those who work for it. In Austin, Texas, Uber and Lyft drivers are suing these two companies because they claim the companies did not give them “at least 60-days’ notice under the Worker Adjustment and Retraining Notification (WARN) Act.”[II] These drivers argue that they are employees of the company and deserve to receive notice, but Uber and Lyft argue that their drivers are independent contractors not employees.

Uber and Lyft faced an opportunity cost of running background checks on their drivers, but decided not to choose that opportunity cost.  By leaving the city of Austin, these “firms attempt to maximize their profits.”[III]These companies decided not to spend time and money on vetting drivers because they believed it was an unjustified expense. Since the companies were primarily focused on their goals, they took the position that their drivers were not employees and were not entitled to legal notice of their withdrawal from the Austin market. The consequences of their actions resulted in lawsuits by drivers of these companies under the WARN act, but the companies argue that the WARN act helps employees only. Uber and Lyft argue that their drivers are “independent contractors and not subject to a number of benefits and protections afforded employees under federal and state laws.”[IV] While these companies might have incentives in leaving the Austin market, their actions caused negative externalities for the “independent contractors”.

All in all, it has not been the general practice for large firms do take into consideration both their “opportunity costs” and also the “opportunity costs to others”. When choosing an opportunity cost, firms should respect the opportunity cost of those who work for them, whether or not employees are independent contractors, not just selfishly consider the best alternative for the company. As seen with the consequences of Uber and Lyft, more harm than good can result in deciding to leave a market such as Austin without warning.  That harm can include reputational harm in other markets as a result of the unilateral action of leaving.  When deciding the “best” for the firm, the firm should consider all the options for the company, those who work for the company, and those the company serves.

Foot Notes

[I] Charles Wheelan, Naked Economics: Undressing the Dismissal Science (New York: W.W. Norton & Company, 2010), pp. 4.

[II]   Kelly, Heather. “Uber and Lyft Drivers in Austin Sue the Companies.” CNNMoney. June 10, 2016. Accessed June 14, 2016. http://money.cnn.com/2016/06/10/technology/austin-lawsuits-uber-lyft/.

[III] Charles Wheelan, Naked Economics: Undressing the Dismal Science (New York: W.W. Norton & Company, 2010), pp. 12-13.

[IV] Kelly, Heather. “Uber and Lyft Drivers in Austin Sue the Companies.” CNNMoney. June 10, 2016. Accessed June 14, 2016.  http://money.cnn.com/2016/06/10/technology/austin-lawsuits-uber-lyft/.

[Image] Passmore, Dylan. January 14, 2014. Imagine Texas Blog: Complete Streets Coming to You, Austin, Texas. http://www.austintexas.gov/blog/complete-streets-coming-you.

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