This article featured in Business Line on August 10, 2008. Liked it very much, but couldn’t find it in the paper’s archives, so I’m writing it down for you guys…
Food for thought
Recently, my friend and his schoolmates went to an expensive restaurant during their school reunion. His experience is “food for thought” for economic buffs.
The group, he recalled, ordered more than they could eat and wasted lot of food. How can economics explain their spending behavior?
Suppose you and your friend go to an expensive restaurant. You find that a large portion of your favorite meal costs Rs.450 while a smaller portion costs Rs.320. Which would you order?
If you are dining alone, your choice would depend on whether you will derive a greater satisfaction by paying Rs.130 more for the larger portion. If not, you will settle for a smaller portion.
EXPERIMENTING WITH FOOD
Now, what if you and your friend decide to share the cost? You may reason out that a large porstion would be a good deal. Why? You have to pay only Rs.65 more for ordering the larger portion; your friend will bear the balance.
Extend the argument to my friend and his school buddies. They knew that the dinner tab would be split among the group. So, there was a tendency for each of them to experiment with the food. Why?
Suppose one of them had a sober diet. That person would still end-up paying for others’ excesses. So, he might as well splurge like the others. The game then becomes economically inefficient.
Each diner orders unwisely and pays more for the satisfaction they derive from consuming the food. Economists call this negative externality – the cost that others have to bear for the economic decision you take.
Does this mean social dining is inefficient? No. Negative externalities typically occur only if the group is unlikely to meet regularly – like my friend’s reunion group.
All of us typically dine with friends we regularly go out with. Negative externality is minimal in such cases. Why?
Each person in the group takes turn to pay. And each of them knows that if they overindulge now, they will be the victim the next time around!