"Take it easy, Farva!"

“No Schlitz? Hell, whatever’s free!”

The open bar on Friday at the GPPI Holiday Party provides a fantastic experiment in human behavior and an interesting example of what happens when a good is made universally available at zero marginal cost. Here are a couple of the most obvious observations.

Costs always have a sneaky way of escaping people when they hear “open bar”. You can be sure the holiday party and the food and beverages provided were not free. The cost is distributed among all students and hidden nicely in your tuition. If anything, we students are paying for a nice evening out for the faculty and their families…the only cost to them is putting up with us. No free lunch here.

There is no way to opt out of the Holiday Party. Even those who don’t want to attend end up paying. So, if you have a test the next day or have other plans or if you are just antisocial…tough luck and thanks for the drink.

The average student is paying a price greater than the benefit they receive from attending the Holiday Party. The D.C. Arts Club is a very nice venue, but definitely not cheap. Because the planning is done centrally and students don’t see the costs directly, the choice is made more liberally. That is, if students saw the cost or participated in the decision they would likely pressure the school to be considerably more frugal. To estimate this inefficiency consider the difference in the amount of fun you would have if the party were held at the Carbarn (or any other less extravagant venue) with less professional catering and consider the potential difference in cost. My best guess of the excess spending is something on the order $15 to $20 per student.

The event is over attended. (“Is” as in “it is a fact”; this is not a subjective conclusion.) The cost is sunk, so students will show up even if they get the equivalent of $1 net enjoyment from attending. This disassociation of cost creates the inefficiency described above, but it also exacerbates it by making the event more crowded and further reducing the benefit for those who otherwise would be willing to pay to attend. Just ask yourself how much you would pay for the evening to be less crowded, loud, hot, and sweaty and for there to be shorter lines at the bar, etc. I doubt the amount is zero for anyone. For me, it’s about $10.

Moral hazard* causes people to drink more beer than is optimal. This is not to be confused with too much beer…obviously there is no such thing as “too much beer”**. With an open bar, the marginal cost of one more beer is zero. This is part of the appeal of an open bar and I enjoy getting drunk with no financial regret as much as the next guy. But beer isn’t free. Knowing that the costs are spread among all students gives everyone an incentive to drink as much beer as they can and in the end everyone pays what the average person drinks. This drives up the total cost of the evening, creates crowds at the bar, and basically ensures they will run out of good beer. What is the optimal amount of beer? Exactly the amount that would be consumed if students had to individually pay for each drink. In this way, not a single person will have to pay a cost greater than the benefit they receive from each drink. An open bar guarantees either a shortage or that most people will end up paying MORE for their last beer than what it is worth to them

Granted there is a public goods aspect to the event—camaraderie, boosted morale and whatnot. But I have absolutely no doubt we could design something that maintains the level of the public good without sacrificing nearly as much efficiency. To provide a quick example: Suppose we charge people some fraction of the cost at the door (say $20), immediately refund that fee in food and drink vouchers, and then charge cash for drinks when the vouchers run out. The $20 will deter a few of the people who would get the least enjoyment from attending*** and it will reduce the cost for those who can’t or don’t want to attend. The people who don’t want to drink as much can give away, trade or sell their drink coupons. The vouchers will initially maintain the illusion of an open bar while still communicating a price for drinks. By the end of the night, prices will reflect the true cost. Voila! Fewer people, better atmosphere, lower costs, shorter lines at the bar and more fun for everyone (and more drinks for me)!!! I would also expect that having fewer people show up and associating some of the cost of attending would help provide more incentive for the organizers to satisfy people’s preferences in terms of choosing the venue, caterer, and so on.

I would estimate the total waste to be about $20 to $30 per student. Seems large? Just think about it: The whole thing probably costs at least $50 or $60 per person. Would you be willing to pay more than $30 for a ticket? More than $35? $40? What about all those who don’t attend—how much would they be willing to pay***? I wonder how many sanitary pads a person could buy with $20 or $30?

I will admit the consequence of all of this inefficiency is minimal—students are not going to come to GPPI based on the quality of a party (two parties, maybe) and they aren’t starving by having to waste a few dollars on the shindig. But we are trying to teach policy. The real confusion for me is why anyone would support government institutions or programs with HUGE consequences that build-in the same inefficiencies illustrated here when the examples of how that sort of planning fails are so accessible.

There must be a lesson in here somewhere.

*Yes, moral hazard does exist.
**No joke. Just like there is no such thing as “too much healthcare”. There is such a thing, however, as healthcare with associated costs that exceed the benefits.
***And, by the way, those people would prefer to be deterred.
****Huh, probably close to zero!