Wedding season is almost upon us. I love weddings. When I think of weddings I think of dressing up, mingling with friends and family we haven’t seen in a while, fancy venue, and… free beer.
I’ve experienced weddings from a few different perspectives: as a guest, as the co-star, in a supporting role and as the bartender. Bartending is a great gig for a college-age kid by the way.
Bartenders are notoriously observant…especially once the guests are loosened up and start filling the dance floor because this is the time when things start to slow down for the bartenders giving them a chance to really observe the festivities. Not long after this point (sometimes it feels far too soon when you’re a guest) the party begins winding down, and the cleanup begins.
But you don’t need to be a bartender to make the following observations. In fact, I’m sure you’ve already made these observations:
People consume a lot more alcohol when there is a hosted bar as compared to a cash bar.
People consume higher quality, more expensive liquor when top shelf is included in the package than if they had to pay full fare.
People waste a lot more at a hosted party than they would otherwise. Just ask anyone responsible for cleaning off tables afterwards. You’ve never seen so many half-full glasses.
These observations, as simple and humorous as they may be, have huge implications for economic policy.
What we’re all witnessing at most every wedding we attend is the impact of price on demand and, more specifically, the impact of subsidies and price controls on consumer behavior.
If the cost to the consumer of a thing is eliminated or reduced by some third-party intervention you will tend to get a greater consumption of that thing. As a result, costs to the third-party will skyrocket over time. You also tend to get greater waste, which implies wasting resources that could have been used for something / someone else.
In cases where the “thing” is in limited supply, artificially lowering or capping prices leads to shortages (think price controls in the 1970s or price controls in the midst of a natural disaster or Venezuela right now). Conversely, artificially increasing prices or propping prices up with price floors leads to excess supply.
Price is an extremely important market signal and sends critical information to both producers and consumers. By distorting price the market itself becomes distorted. These distortions often take the form of too much demand and not enough supply or vice versa, resource wasting, misallocations of capital, malinvestments, asset bubbles, market crashes, excessive debt, etc…
Next time you’re analyzing a policy just think back to the open bar example. You might rediscover some truths you already knew to help with your analysis. After all, isn’t wisdom the ability to apply knowledge gained from past experiences to new situations?
Free Dinner and Drinks!
So speaking of free beer, I will be hosting dinner and drinks at a local restaurant in April. I’ll talk for about 20-30 minutes about a couple extremely valuable investment concepts while the rest of the time will be left open for eating, drinking and being merry.
If you are interested in joining us, please email me to let me know how many you think would come from your household. Even if you’re not in Green Bay but have interest, please email as I will travel if there is enough interest in other cities.
More details to follow. Keep an eye out!