Saturday, 2 June 2012

Incentives matter: overhead-bin file

Resource allocation by non-price mechanisms usually doesn't work at all well. It gives people the wrong incentives for use of the resource. Don Boudreaux makes this point in a letter to USA Today:
Gary Nudd pleads with airline passengers to “play by the rules” when storing carry-on luggage (Letters, June 1). Makes sense. But a little-known fact that helps to explain today’s chaotic scramble for overhead-bin space was reported recently by Politico: “Two years ago, [U.S. Sen. Charles] Schumer got five big airlines to pledge that they wouldn’t charge passengers to stow carry-on bags in overhead bins.”

Overhead-bin space is scarce and, hence, valuable. So some airlines sensibly experimented with charging for its use. Government intervention, though, stopped this scarce commodity from being allocated by prices. As any Econ 101 student will tell you, the result is a costly free-for-all in which bin space is allocated far more arbitrary – on a first-come, first-served basis – than would be the case if allocation were guided instead by prices.

Sen. Schumer likely imagines that by ridding reality of one of scarcity’s symptoms – prices – he miraculously rids reality of scarcity itself. Today’s mad and frustrating clambering for space in overhead bins, however, proves that Sen. Schumer is deluded.

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