Friday, February 28, 2014

Economics is not Engineering

Since I've now seen this terrible infographic twice, I feel coerced by my conscience to comment.

The gist: the price of pizza does not increase in 1:1 proportion to its surface area. Bigger pies tend to have a lower nominal spot price when measured by the square inch. Smaller pizzas are "overpriced."

Ordinarily, I'd assign this as a midterm problem for a Principles course and not give it a second thought, but this egregious error of economics nosed its head up on NPR's Planet Money, a foul mushroom sprouting from an overripe meadow muffin.

Okay, so if this price discrimination story has any bite (see what I did there?) then it stands to reason that the LMM should be ordering the Turbo XXL Megachurch Family Sized pepperoni home for delivery while Mungo's off gallivanting around Muncie on "walkabout". Why, she'd be crazy not to!

Anyone else see the problem here?

Look people, prices happen for a reason. There's a whole production process. On the supply side, a small pizza has roughly the same production (opportunity) cost, at least for labor, as a large. Furthermore, ordering a large pizza for several people economizes on scale on both sides. A family getting the biggest pizza necessarily compromises on preferred toppings (this is Oi's apple pie paradox), and these individual moves from Pareto optimality are compensated by lower price.


This is really very elementary economics. How does a very basic error like this end up on an otherwise respectable radio program? It doesn't seem like economic illiteracy should be to blame. If you're perceptive enough to notice price discrimination, it seems as if you should be bright enough to understand that there might be a good reason for it. No, I think something else is going on here. I'm just not all that sure what that something else actually is.

But anyway, the next time you stuff your craw with a personal-sized pizza, I guess you should be mindful that your purchase isn't necessarily euvoluntary. Or something.

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Do you have suggestions on where we could find more examples of this phenomenon?