Crawl Across the Ocean

Monday, August 29, 2005

Somewhere, An Economist's Head Just Exploded

I was reading the fine print on a ticket the other day, and it read:
"Everyone must have a ticket, including children. Babes in arms (6 months or younger) are allowed in free but are not encouraged."

Economics, meet Reality, I don't think you've been properly introduced.

In case I'm being overly cryptic (it happens, I'm told), a central premise of economic theory is that rational people will always consume more of something as the price gets lower, so the idea of making something (e.g. bringing babies to the theatre) free and simultaneously claiming to discourage it, is pretty much an impossibility in your average economic model which is unable to account for moral suasion (among other things).


  • a 7-month old has to pay for a ticket? hahaha, poor breeders.

    By Blogger ainge lotusland, at 2:10 PM  

  • yeah, David Frum wouldn't be happy.

    By Blogger Declan, at 2:26 PM  

  • So if you go into a movie theatre and paid 13 bucks for a ticket you would not be at all disturbed by a 6 month old child wailing away the entire time?

    Economics might not account for moral suasion, (although the Bank of Canada uses it to get banks to keep minimal reserves) but crying babies are an 'externality'. A crying baby doesn't bother its parent so much as it bothers people around the crying baby. That is an externalized cost, which is also a central premise of economic theory. Making parents pay the ticket fee causes them to bear the cost (internalize it). Look at it this way: the movie theatre is charging the parents 13 dollars for the right to have their child cry at some point in the film.

    If someone complains to them about their crying child, they have purchased the right for that kid to be there. If the movie theatre is willing to sell the child a ticket, then the parents can sue or take out damages if they are thrown out of the theatre. The theatre would be at fault for being willing to sell a ticket to a child who is likely to cry at some point in the movie and then asking the parents to leave if it does.

    Babies cry; the movie theatre wants you to get a baby-sitter with that 13 bucks and let everyone enjoy the movie. That's the signal the theatre is sending. It costs you 13 bucks if you leave the kid at home or bring him/her to the movie.

    By Blogger AWGB, at 3:57 PM  

  • Aaron, my point was not that I wouldn't be annoyed by a crying baby, it was that economic models don't really allow for a situation where the price of something (bringing a baby less than 6 months old in) is reduced to 0, and yet the demand for that thing is at the same time expected to be reduced, simply by making the statement that demand for that item isn't encouraged.

    True, you could consider the statement of discouragement (by the ticket issuer) itself to be an externality (which it is), but then externalities such as this are hardly a central premise of economic theory, other than that it is acknowledged that economic theory can't really incorporate them, and it is hoped that they aren't significant enough to cause the conclusions drawn from the theory to be wrong (but really, who knows).

    As an aside, the Bank of Canada doesn't use moral suasion to get banks to keep reserves - they don't call it regulatory capital for nothing:

    By Blogger Declan, at 5:33 PM  

  • Declan: I think that your fault is with the movie theatre's version of economic logic. You are actually arguing an internally consistent economic theory. Your fault is not with economic theory itself, but with the theatre's faulty application.

    I see clearly what you are saying: You can't offer anything for free and then discourage people from taking it. That's a totally mixed signal.

    This scenario is almost identical to the student-government operated bar on my campus. On one hand they posted a $60,000 loss for the year and vowed to get business back. They said they would do this by fostering a more positive view of the bar in the public as a responsible-drinking establishment. In order to curb consumption, they raised prices. And they wonder why there's no business. The moralism of drinking responsibly doesn't enter the theory anywhere because it doesn't need to.

    Business goes down? Quantity sold is an inverse function of price.

    Did the price go up? Yes.

    What caused it? Have to find an explanation.

    I think that economic theory and logic only helps you to find a possible answer in this case.

    Not sure what you intended for me to find in the B of C page. I was referring to the method of last resort by the B of C.

    "Monetary Policy Transmission and Policy Effectiveness

    The instruments that we have used for the transmission of monetary policy have also changed over the years. In the first 35 years of the Bank's existence, we relied on a "belt and braces" approach to policy execution, in the belief that credit was fungible and that every possible financial avenue had to be covered.

    The result was a complex mix of primary and secondary liquidity requirements, interest rate ceilings, quantitative limits, outright restrictions and prohibitions, foreign exchange market intervention, and—when all else failed—a healthy dose of moral suasion. Attempts to describe the conduct of monetary policy turned into a bewildering stream of arcane details that left listeners confused or—it was sometimes hoped—in awe of the economic alchemists who plied this mysterious craft."

    By Blogger AWGB, at 5:53 PM  

  • Aaron, the difference is that I think the appeal to moral suasion by the theatre will probably work, thus making the demand curve violate economic 'principles' (and ruining the models). So I think the theatre is probably right and standard economic theory wrong (in this particular case).

    As for the link, my apologies, I should have been more clear, if you search for 'regulatory capital' (which is what I thought you meant by reserves', sorry my mistake) in that link, you'll see that the amount of regulatory capital (capital kept in reserve in case of emergency) is determined by the Office of the Superintendent of Financia Institutions (OSFI), who in turn takes guidance from the Bank of International Settlements.

    But we're talking about two separate things, as I now realize. Your link is talking about formal reserve requirements, (banks having to keep on hand a certain percentage of every deposit) which Canada phased out (thus ending the need for moral suasion) like Dodge says in his speech that you link to.

    It's kind of like the flip side of a coin, banks either having to keep a certain percentage on hand for every dollar they receive (reserve requirements) or having to do the same for every dollar they lend out (regulatory capital), but I should have realized what you meant, so my apologies for the confusion.

    By Blogger Declan, at 7:37 PM  

  • Declan:

    I seriously think that basic economic theory can model the behaviour of the movie theatre. The key is to realize that it is a 'model', which is an approximation of reality. Like any other sort of mental construct. Everyone uses some sort of model - whether political scientists analyzing voting patterns or philosophers examining logic.

    I'm not a firm believer in 'economic' laws, but generally, as you are saying, if you want to sell more tickets, then lower the price.

    It might actually be against the law for the theatre to ban a child under 6 month of age, because even they could go to an R rated movie, as they are accompanied by an adult.

    One model that might work is a form of market signalling. If, say, you advertise a rave and use nothing but pictures of rednecks, you will send a mixed market signal. You might not get the ravers out and will instead attract folks looking for a ho-down.

    Basic marketing (and economics) would have you target a specific market, as based on a few characteristics like age, interests or whatever else.

    A solution may be found with a dual demand curve. This is not often taught as an economic 'principle' per se, but it is possible for every customer to have their own demand curve. This is the basis of bulk pricing, where dicounts are offered in buying more and more units at a time. High-demand people pay a lower price and vice versa.

    Perhaps the movie theatre has identified two classes of customers: one class who insists on having their child with them (don't care what others say) and another class who is sort of indifferent because they are worried about what others will think. The theatre is tring to minimize the costs imposed on others by a crying baby by politely saying that it sees babies as a burden. The second group might engage in 'self selection' by either paying for a baby sitter or trying another kid-friendly theatre.

    You are still right in saying that it's odd, but i deisagree with this as being a violation of economic theory altogether. I have an incentive to, after all.

    By Blogger AWGB, at 8:56 PM  

  • I see what you're saying, but I think we'll have to agree to disagree on what basic economics can account for.

    By Blogger Declan, at 7:39 AM  

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