Friday, March 21, 2014

Inelastic Supply and the 1%'s Demand

This NY Post article  tells a story about the transportation of rich Manhattan people to a weekend beach community.  There are a finite number of slots on the fast train. The rich reserve slots and pay an extra fee but then 30% of the time don't bother to show up and later receive a refund because they didn't show up.  Thus, they have a a low cost option that has the net effect of displacing the 99% from getting to where they want to go.   What happened?

There are two pieces of interesting economics here.   First, if there was a spot market in tickets then the rich guy who bought the property right to ride the train but now realizes he can't make that specific trip would be able to sell his ticket to some other guy at zero transaction cost.  Since there is no re-sale market, they can't find each other and the seat goes empty.

Second, the train has finite capacity with a fixed number of seats.  This is the vertical supply curve case and it appears that the train company hasn't raised its price enough on peak summer days.  The 99% clearly want the train supplier to engage in price discrimination such that the rich are charged more than the 99%.  Another alternative would be to run more trains during the summer time.  The article goes on to say that the train company plans to shorten the refund window so that the 1% will face higher costs to reclaiming their $ for rides that they reserved but then didn't use.