My first assignment in the Principles course at the Gokhale Institute is essentially Robert Frank’s famous assignment (pp. 61 in this PDF). Submissions are due on the 5th of September, and I look forward to reading them.
In today’s blogpost, I am going to try and write one of these myself! Three reasons for doing so:
- Skin in the game, practice what you preach, only ask others to do something if you’ve done it yourself.
- Some students might find an example essay useful
- It will be fun!
The essay is below the fold.
One of my favorite places to eat in Pune is Bedekar Misal. The place has been around forever, and the quality of the food has remained consistently good. If you haven’t yet been there, consider trying it!
The last time I was there, though, I noticed something interesting. The menu is printed on two flex sheets that have been put up at both ends of the premises. And the menu says that a regular plate of misal costs 90 rupees. If, however, two people choose to share one misal, then the price goes up to 130 rupees.
Why should this be so?
The costs of production don’t change depending on how many people eat a plate of misal. Neither do the costs associated with serving a plate go up depending upon how many people share a plate. Why then should the owners be charging a higher price for a shared plate?
Because what is scarce, and therefore at a premium, is a place to sit within the cramped confines of the restaurant. Try visiting the place at around one pm, and you’ll see a queue of hungry but patient would-be patrons waiting outside.
Now, if two people occupy a table but have only one plate of misal, that is revenue foregone for the restaurant. If two strangers were sitting at the same table, that would be revenue worth two plates of misal. Even if they knew each other and ended up having one plate each, that would still count as revenue worth two plates. But if they share a misal, well, that’s a loss.
And so what Bedekar Misal does is it puts up a negative incentive in place. Sure, they say, you can have one misal between two people. But you must then pay more. In effect, you are getting half a plate of misal for 65 rupees. At the margin, there will hopefully be folks who will consider this deal and reach the conclusion that paying just 25 rupees more is worth it. If they do, Bedekar Misal gets revenue worth two plates.
And if people choose to walk away from the restaurant rather than pay more for the same plate, well, it still works out just fine for Bedekar Misal. Why? Because there is no shortage of hungry people waiting in line!
So the problem of scarcity of space is solved by not explicitly charging for renting a seat. It is solved, instead, by increasing the price of the good you consume while occupying the scarce resource. That lowers the demand for a shared plate, and therefore increases the number of customers paying full price, while occupying space.
And that’s why this rather odd policy makes sense, once you apply simple principles of economics. Incentives, as it turns out, do matter.
I ended up having two plates all by myself, for the record, but alas, Bedekar’s doesn’t yet offer bulk discounts.
This essay clocks in at 484 words, well within my strictly enforced limit of five hundred words. To everybody reading this, an invitation – and especially to my students: feel free to tell me how the essay could be better! In effect, grade my submission, because I will soon be returning the favor 🙂
P.S. There are some folks who don’t like misal, but that’s fine. Nobody’s perfect.
EconForEverybody 