What Happens When You Set Marginal Prices = 0?

I taught econ 101 at Columbia University for several years.   I taught thousands of students but perhaps none took jobs in the Columbia Administration.  In my class, we talked about the law of demand but we didn’t discuss the undergraduate demand for Nutella.   Apparently when you offer it at marginal price of zero, demand is huge.    To quote the Times;

“Last month one of Columbia’s undergraduate dining halls began serving Nutella every day, not just in crepes on weekends. For the uninitiated, Nutella is a creamier-than-peanut-butter, chocolate hazelnut spread from Italy that a college student might eat a whole jar of in a single sitting when the pressure is on.

The problem was that the Columbia students went through jars and jars of Nutella — at least 100 pounds a day, according to a freshman member of the Columbia College Student Council who had urged the university’s Dining Services operation to provide it in the first place. Apparently they were not just eating it in the dining hall. They were spiriting it away in soup containers and other receptacles, to be eaten later.

For Dining Services, the unexpected demand was an unexpected expense.”

This specific story has many implications for how we run the modern University.   Zero marginal cost pricing for water, toliet paper, napkins, lighting, printing, and food create bad incentives and a lack of sustainability on the modern campus.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

48 thoughts on “What Happens When You Set Marginal Prices = 0?”

  1. I assume that the “free” Nutella will be factored into tuition somewhere or other. Meanwhile, if you paid me, I wouldn’t eat it. Eeek. No offense to people who like it though.

    How was your talk? Where is my transcript? ; > I am just starting to read Glaeser’s book, I guess he is a fellow traveler?

    1. Students pay to be on the meal plan. Charge is per meal, not per item. In effect, every meal is an all-you-can-eat buffet. Students are not supposed to take food away, but this generally isn’t a serious problem since the meal plan is supposed to supply the full nutritional needs of the students – so taking the occasional banana or orange or donut doesn’t cause a problem. But Nutella is a high-cost item. It’s supposed to be a bit of a luxury, not a mainstay of your caloric intake. And it comes in small jars, so students have apparently simply been walking out with them. That’s moving from the sort of minor pilfering that’s socially acceptable toward something that looks more like theft. “Students have been filling cups of Nutella to-go in Ferris Booth Commons and taking the full jars out of John Jay, which means we’re going through product faster than anticipated.”

      http://www.columbiaspectator.com/2013/03/05/nutella-ferris-booth-costs-dining-5000-week-part-due-dining-hall-thievery

      And Iit’s nothing remotely like toilet paper, water, napkins, or lighting.

      1. And of course, it’s highly beneficial to the dining hall to have the meal plans, because it means that their cash flow is stable and that they are paid for meals months in advance. The students are locked in and can’t look at the menu and decide and go off campus for a burger. Parents like it, because it means that the students – most of whom have lived at home and never had to deal with their own food – are guaranteed balanced meals. The problem of cross-subsidization – skinny, small kids paying for the meals of bigger kids – is just something the parents put up with. And generally, over-consumption is not a problem, because (1) food is cheap, and the costs of labor and overhead are fixed, and (2) as long as most of the stuff can’t easily be taken away (take an omelet back to your room for later?) the cost of waste and pilferage is set off by the increased efficiencies of no check-out.

        1. On the other hand, more food is likely going in the garbage can than would be the case if the students were explicitly paying for each meal including seconds.

  2. Ok I agree here, but toilet paper? I mean, look I have basically a steady state consumption of toilet paper, and unless you want to run the bathroom intoa profit center, I don’t think raising the market price of a square of TP is where to look for sustainability improvements.

    As for the water consumption…ideally that would be municipal level. A thought experiment though, how much would you have to raise the price of your household water bill before you altered any lifestyle choices?

  3. John I think the point is that the final consumers of the resources – students – experience a price of 0 even though that’s not optimal from a resource preservation standpoint.

  4. Gosh, I was unaware of the wantonly excessive use of toilet paper on college campuses. But, like those heart bypass surgeries I keep getting recreationally (because, hey, I’ve got health insurance), it must be true, because an extremely simplistic application of Econ 101 says so.

    This astoundingly-below-RBC-standards post brought to you, yet again, by Matthew E. Kahn. That’s gonna be a quarter a wipe from now on, Professor.

  5. In my office, they lock the toilet paper dispensers. To get any, you have to unspool it. When you need it, that’s worth doing! I guess you could sit on the pot, pull it from the dispenser, and roll it around a stick, then triumphantly take it home and… I guess the time required is enough to deter, and the fact that it’s cheap enough in the first place. There is a quarter-apiece sanitary napkin dispenser in the ladies. So people are in fact thinking about incentives here.

    1. In pretty much every workplace, business, and public building of any size they lock the toilet paper dispensers (though in my workplace when they reload they place the unfinished roll on top of the closed dispenser).

  6. What are we to surmise from this, given that the marginal cost of posting to this blog is zero?
    (and commenting too, I may add.)

  7. I’m not sure I understand the point you are trying to make, Matthew.

    I must assume universities lump those, not exactly externalities, into a “miscellaneous account” much as banks inflict undefined, “administrative fees” for their general paper shuffling. And, if gas stations figured out quite a while ago that air was not “free,” surely it can’t be beyond a university’s marketing/accounting capability to do likewise for toilet paper.

      1. I’ve had to pay for air before. Was this a violation of the law? I don’t go back to those stations anyway.

        My nearby Costco — my home away from home! — now has a self-serve, digital tire-filling gizmo. It’s maaaaaaaaarvelous.

        1. You say “I just bought some gas, would you give me tokens for the air machine, please?”

          1. An excellent point but sadly, sometimes I just can’t face the human interaction, and I just would pony up the quarters. It’s like those self-serve carwashes. You go once.

        1. Feel free to take a few extra PSI for your ride.
          After all, Somalia is a long way away…

  8. This is the weirdest post I’ve ever red on a literate blog. I’ve red some far-out (“whacko” might be an accurate descriptor) posts from alleged economists on Marginal Revolution, but nothing that even comes close to this.

    Hellloooo … Earth to Dr. Kahn … students who eat in the dining hall pay for the privilege of eating there. The food is not free; it’s paid by the semester, or quarter, or whatever. There is no “marginal cost” for going back for seconds. When I was in college, I lived in a dorm and ate at the dining hall. I had a high metabolism and a huge appetite, and I normally went through the line twice … at EVERY meal. Double bacon, eggs, and toast in the morning. Double franks and beans at noon. Double mystery meat and potatoes at dinner. There was no “marginal cost” to my second helping of mystery meat.

    That’s the way dining halls work.

      1. You betcha. And I was grateful, too. After every meal, I’d thank some skinny kid for leaving that extra portion of potatoes for me.

        Of course, at that age I was one of the skinny nerds, so appearances can be deceiving.

      2. Yes, but, otoh … sometimes large, often male students help the smaller ones, I don’t know, lift heavy things. Haul suitcases. I have seen this happen.

        So on average, a lot of this equals out. It is that thing called … civilization. Who has the mental energy to keep tabs on every little thing like this? Cheese and crackers.

    1. Um, Ken… the cost was to the college. And the kids who ate less, but paid the average cost of food per student, were buying you your bacon.

      1. Um, Dave … your second sentence belies your first. If everybody pays the average, the cost to the college is exactly zero.

        And yes, we all know the second sentence is true. That’s the way averaging works.

        Actually, on second thought, no, it’s inaccurately stated. The kids who ate less were not “buying” my food, they were “subsidizing” it. The amount of their subsidy was equal to the differential cost of my food above the average price I was charged. So I was paying most of the cost.

        1. So, who paid/subsidized my meals? With my athletic scholarship in tow my meals were “off menu.” As you guys were munching salisbury, I was devouring rib-eye………stacked three high.

  9. The default position is that wants are satiable. 100 pounds of Nutella a day is not a large quantity spread (sic) over several thousand students. That’s why not pricing everything at the point of consumption is normally sustainable, as well as a sign of a civilised community. Fay çe que vouldras.

    1. James, thank you for eloquently stating the principle of my personal example.

      By the way, isn’t there some better notation than “sic” to show a pun. Sadly, I don’t know what it would be, but “sic” implies that some error has been transcribed. To me, a well-crafted pun is nowhere close to that.

      1. Humor explained is humor destroyed.

        People either get the pun, or they don’t.

        Some people use (pun intentional), but that is as unfunny to me as someone who broadly points up their puns in speech.

        1. Doesn’t “sic” translate “thusly,” and therefore merely indicates an intentional spelling or expression? I don’t think it means “wrong,” just “done that way.”

  10. I know when I moved out on my own and had to start buying my own toilet paper I just starting pooping less.

    1. Ah, well, by that you mean, you pooped less often, but there was more volume? I guess an economist would call that an efficiency gain. I think we’ve reached the “bottom” of this discussion.

      1. Maybe AAA ate less, having to pay for food. Good idea, really. There are savings on both ends.

      2. I eventually trained myself to poop once a day, first thing in the morning right before my morning shower. I call it the Bellmore method.

        1. I thought I was done … but … it occurs to me to mention, TJ’s sells tp that is 80% post consumer, and it works just fine. If anyone is still reading this.

  11. So in a restaurant one can deplete the sugar bowl of all the sugar packets, the napkin dispenser of an inch of paper, etc. The cost of pricing all of these products is greater than the gain from having to keep track of all of them.

    Nor do the airlines charge more for someone who is twice my size (and may, unfortunately, flow into my side of the armrest) or luggage by the pound, even though each pound adds to the flight cost.

    In other words, we have a sort of microeconomic Heisenberg principle, whereby the cost of observing and charging is greater than just forgetting about it.

    1. “…microeconomic Heisenberg principle, whereby the cost of observing and charging is greater than just forgetting about it…”
      True for toilet paper! Not true for Bacon and Nutella, which are expensive!

      And, as time passes, gets less true for some things whose relative value/scarcity are rising. Like, road access (and in particular because GPS and license plate scanners make observing and charging relatively cheaper) and water. Packets of sugar/saccharin at the restaurant were in that category, but now stevia is relatively hugely more expensive, and you ask the waitress and she will give you a packet or two with the coffee she brings you.

    2. This is very true, and a real issue in telecoms – “unlimited” data tariffs tend to encourage people to pig as much as they can, but fancy differential-service pricing schemes tend to be difficult to engineer and expensive, and metering everything causes people to just stop and use nothing. The answer, as far as anyone knows, seems to be to forget the fancy pricing and set a cap rather more than the average user is likely to get through – the aim is that you don’t count web pages, but you don’t think “whoo! why don’t I just torrent all the porn now!”

      1. Or watch streaming video from netflix, amazon, hulu, etc. Oh, I totally forgot! The telcos don’t (want to) charge for their own content stream bandwidth. In practice, you’ll increasingly have the “choice” of the restricted content streams your underlying telco decides to support, or nothing.

        That’s just so much better than having the freedom to choose your own digital library sources! Ummmm I don’t think so.

        Bandwidth caps are evil, and understanding this doesn’t make you a pr0n addict. Not understanding it does make you a supporter of vertically integrated, walled off and constricted, corporate media silos.

        This is, of course, one of the underlying tremendously important issues captured under the umbrella term “Net Neutrality”.

        1. I don’t know when or how “open slather” became equivalent to “common carrier”. Having a phone bill doesn’t mean that the operator censors the content of your calls.

  12. Nutella is a creamier-than-peanut-butter, chocolate hazelnut spread from Italy that a college student might eat a whole jar of in a single sitting when the pressure is on

    “When the pressure is on”? That’s not what we called it in my day.

    1. That’s just because you didn’t have pneumatic bongs in your day, grandpa.

  13. You really cannot have a marginal cost of zero. For anything you take, even with a dollar cost of zero, there is the time cost of taking it. For Nutella, a high-price spread, the marginal cost which is scooping it into a plastic cup is not very costly relative to going to a store and buying it. For toilet paper, to unspool it out of the locked box onto the paper-towel-core you had to remember to bring to school and remember to take into the stall with you – this is a lot, relative to going to the store and paying 50 cents a roll.

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