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.
