Restaurant Puzzles
Does restaurant pricing have lessons for electricity pricing? We know that thousands (millions?) of restaurants for decades (centuries?) have freely chosen to price the food and not the table. As the thought exercise below suggests, that’s not how rational economists would do it. When it comes to electricity, we don’t have freely chosen pricing. It’s all been determined by rational economists and regulators. Since accurate pricing is the most fundamental element of an effective market, do you see how we have a profoundly serious problem with our so-called electricity markets?
“Imagine a restaurant designed by an economist. At each table there is a clock; it starts running when the waiter shows up to take your order. When you get your bill, one of the items is table rental, based on the number of seats at the table and the length of time for which you used them.
The advantage of this approach is that it can give diners the right incentives on both margins. Diners who want to spend an hour and a half in conversation are free to do so, with no dirty looks from the waiters since they are paying for the privilege. Under current circumstances they are imposing a cost on the restaurant and the patrons waiting to be served and, social pressure aside, have no incentive to take account of that cost in deciding whether or not to move the conversation to some less costly space, perhaps someone’s living room.
…Producers frequently follow pricing polices that lead to wasteful competition for underpriced goods. Doing so appears to make the producer worse off, contrary to what we would expect from the usual economic assumption of rationality.”
