Air Travel and The Pillars of Economic Wisdom, Revisited

I recently talked a few Southwest Airways coverage relating to passengers who require the usage of multiple seat, and the way it supplied a very good alternative to go to one among David Henderson’s Ten Pillars of Economic Wisdom – there ain’t no such factor as a free lunch. However it additionally occurred to me there’s one other merchandise on the record that’s related to those sorts of seating insurance policies. One may assume that an individual who makes use of two seats ought to pay for 2 seats, as a result of they’re utilizing twice as many useful resource items as an individual who solely occupies one seat. However understanding one other pillar of financial knowledge reveals a considerably extra delicate take. 

The third pillar is “Financial pondering is pondering on the margin.” For instance, within the good competitors mannequin, we are saying that the value of a widget might be equal to its marginal value. The marginal value of a widget is how a lot it might value the corporate to supply yet one more widget. Pondering on the margin means fascinated about issues by way of the subsequent accessible unit. Adam Smith was puzzled by the truth that one thing important like water was cheap however one thing frivolous like diamonds might be very costly certainly. The so-called diamond-water paradox is defined by pondering on the margin:

The marginalist rationalization is as follows: The whole utility or satisfaction of water exceeds that of diamonds. We’d all relatively do with out diamonds than with out water. However virtually all of us would like to win a prize of a diamond relatively than an extra bucket of water. To make this final alternative, we ask ourselves not whether or not diamonds or water give extra satisfaction in complete, however whether or not yet one more diamond offers larger further satisfaction than yet one more bucket of water. For this marginal utility query, our reply will rely upon how a lot of every we have already got. Although the primary items of water we devour each month are of huge worth to us, the final items are usually not. The utility of further (or marginal) items continues to lower as we devour an increasing number of.

In my authentic publish, I discussed that a part of the price of occupying two seats is the opportunity cost – by taking on two seats, you’re stopping another person who had journey plans from having a seat as effectively. And I discussed that other than Southwest, the final coverage is for individuals who occupy two seats to pay for 2 seats. However there’s an extra issue I didn’t discuss. 

With these airways, the coverage additionally states that if the flight was something aside from full when the aircraft takes off, then the passenger who had to purchase two tickets might be refunded for the price of the second ticket. And pondering on the margin, this is sensible. If the flight was full, then the second seat this passenger used might have been a seat that was accessible for an additional traveler. On this case, the passenger utilizing two seats displaces the journey alternative of one other potential passenger and prices the airline the chance to promote one other ticket, so the marginal worth of that second seat is one seat. But when there’s even a single empty seat on the aircraft, the margins change. On this case, occupying that second seat didn’t displace a possible traveler, as a result of the marginal potential traveler might have taken the empty seat as an alternative. And when that is the case, the airline will retroactively reprice the second ticket as being equal to its marginal value – that’s, by refunding the second ticket, they retroactively change the value of the second ticket to zero. 

So it’s not fairly the case that an individual who makes use of two items of a useful resource ought to pay twice the value of an individual who makes use of one unit. Pondering on the margin results in a barely extra nuanced take. As a substitute, the thought is that somebody who makes use of an extra unit of a very good must also pay the marginal value of the second unit. Usually, the marginal value of the second airplane seat is a second airplane ticket. However, generally the marginal value of the second seat seems to be zero, and when that’s the case, most airways do in truth set the value of the second seat to be equal to its marginal value.  

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