How To Split A Restaurant Bill

Who pays the restaurant bill?

If you have a meal with nine other people, then your consumption habits probably will depend on how the bill is paid.  If each person pays their share of the bill based on what they consume, then the chances are individuals won’t over consume.  A fairly reliable rule of thumb in economics is that when an individual is able to impose some of the consumption costs on others, he will over-consume relative to a level that is maximally efficient across society.  That’s another way of saying that people respond to incentives, and if there are no incentives against overconsumption, people will over consume.  If each person pays for their own meal, then there is an obvious economic incentive to not over consume.  At the other extreme, if a billionaire Arab tells you he’s going to pay for the entire cost of all your meals then that amounts to ten people’s potential willingness to over consume. 

But what about when the bill is split evenly between the ten people – will the average consumption per person be greater or less than when each person pays for their own meal?  I’m pretty certain that if this were researched you’d find increased consumption when the bill is split evenly.  Here’s why.  Suppose you’ve all finished your main meal, and as a group of ten you are now pondering whether to have a dessert, where all desserts are £4 each.  If you have a dessert, and you’re the only one, then that dessert has only cost you 40p, because the £4 is going to be added to the bill, and thus, divided evenly between ten of you.  If everyone else is going to pay 40p for your dessert then there is equally good incentive for them to have a dessert as well.  Naturally the more people that choose the dessert the higher the average cost.  If everyone joins you in having a dessert then each pays full price for their own dessert, because the sum of dessert expenditures rises to £40 (£4 x 10 people). 

Suppose that you valued the dessert at £2 worth of enjoyment – if you were only paying your own costs you would not have a £4 dessert, because its cost is double your benefit.  If you valued the dessert at £6 worth of enjoyment, you would have a £4 dessert, because its cost is only two thirds of your benefit.  When you’re the only one having a dessert (for 40p) your enjoyment exceeds the cost; when six of you have a dessert, your enjoyment no longer exceeds the cost (because you’re now each paying £2.40 for the share of desserts consumed).  

But now assume something different; you didn’t really want a dessert, but you thought that anything from 40p to £2.40 for a dessert would be too good a deal to resist, so you decided to have one.  Generally, artificially low prices encourage people to spend needlessly and consume wastefully – so artificially low dessert prices will encourage diners to consume wastefully.  This analysis is called a ‘marginal cost’ analysis, and it follows another reliable rule of thumb, which is that if a price is set below a marginal cost, people will over consume (or, in the case of services, over use); and if a price is set above a marginal cost people will under-consume (or, in the case of services, under-use).

Suppose now that instead of all the above restaurant situations, the billionaire Arab walks in to the premises and offers every diner a choice.  He gives each diner £25, which they can spend in the restaurant, but any leftover money they get to keep. This means that if Jill prefers to eat and drink moderately, and take home some of the leftover cash, she can; and if Rachel prefers to eat and drink excessively, and spend the full £25 in the restaurant, she also can.  

This is the kind of mandate that I imagine future governments will think is needed for reforming the public sector  

Finally, I’ll leave you with a tip for forecasting what the future will be like; it is based on what I like to call the ‘prescient wisdom of future ages’.

Prescient Wisdom of Future Ages

Whenever you think about reform or improvement to a system, here's a good way to approach it.  Try to consider how people in the future would do things, and try to emulate that now.  That is to say, in most cases people in the future will have developed the wisdom to rectify the mistakes and inefficiencies of those that preceded them.  That is a very succinct summary of our history of progression.  If you lived in pre-democratic times and you were the first to propound the idea that people might like to choose those who represent them, you'd have made a good contribution to humanity.  If you lived in a time when slavery was the norm, or when no one had considered things like foreign aid, or welfare, or the plight of racial discrimination, or equal opportunities for women, and you propounded wisdom to correct these aberrations, you'd have done your bit to help lift humanity onto its next level of progression.