Tuesday, February 10, 2009

Externalities of a Brunch

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.

4. Economic systems influence choices.
and
8. Quantity and quality of available resources impact living standards.

Yesterday, my students and I discussed externalities as we examined problems with pricing. This morning, there was an excellent story in The Wall Street Journal that provides a great jumping-off point for further discussion. (There is also a slide show, and a related video.) Evidently, there is a temple in Berkeley that serves a wonderful Sunday brunch. Unfortunately, the neighbors are beginning to complain that the smells, the crowd, and the litter are imposing costs on them despite the fact that they are not part of the transaction. The temple maintains they are not selling the food. They accept donations by providing tokens for cash. And the tokens can be exchanged for brunch. Furthermore, the temple maintains this is a religious observance and that the activity is thus protected under law. (Both the laws protecting religion, and the zoning ordinances pertaining to the temple are examples of "institutions", the rules that are established within a system."

The details in the story are interesting. The question for your students is “how would they ascribe costs to the parties receiving the benefits?”

Please share your students' comments if you use this in class.

2 comments:

Ellen said...

In this case it seems that there are no positive externalities, and the only negative externality is the neighbors who suffer from the noise, smells, and trash. Other than that both parties in the transaction benefit. As is said in the article, the temple has shortened the brunch itself, and set up volunteer clean-up crews,but to level the costs and benefits they could also possibly move the brunch into the temple or into a different venue altogether. This would reduce the noise and smells, and volunteers could pick up the leftover trash.

Julia said...

Tim, I read the post in the morning before class and used the slideshow and article to introduce the chapter on externalities. I love it when I can teach the moment.
We had a lively discussion from those who love this kind of food, to those who saw only negative externalities. The discussion also included the Coase theorem and Pigovian taxes.