An Example for the Next Edition of The Economic Way of Thinking?

From a CNN.com column today on airlines charging baggage fees:

A decade ago, who could have imagined paying for airline food? Today, we're lucky if there are bland snacks for sale. Checking two or three pieces of luggage was considered the air traveler's inalienable right. Today we're paying through the nose for our checked bags.

How do we fix this? I can think of two solutions. First, air travelers can buy tickets on airlines that don't charge outrageous fees, like JetBlue and Southwest.

And second, our government can say, "enough!" It wouldn't take much. The Transportation Department could rule that the price of an airline ticket must include at least one piece of checked luggage, and that would pretty much end this debate.

Questions:  what is the likely result if his second proposal were to happen?  Who would benefit?  Who would lose?  Can we say with a high degree of certainty that it would be a welfare reducer?  Why or why not?  Does it matter that utility is subjective and not inter-personally comparable?  And why might the airlines charging for bags support this proposal?

Comments

[Zach]

Easy: airlines would use the ruling as an opportunity to raise ticket prices (way more than the price for checking bags) and be able to have someone else to blame.

I bet the airlines would love it, actually.

[Lee Kelly]

There is a similar problem with restaurants who force customers to buy a drink seperately. Perhaps the government should also say, "enough!" It wouldn't take much. The Food and Drug Administration could rule that the price of a meal must include at least one drink.

Since I always want a drink with my meal, such a rule would never pose a problem for me. I would also be spared the possibility of mistakenly purchasing a meal that did not include a drink. I am kind of like those businessmen who suppose the minimum wage, because they don't pay anyone less than $10 per hour anyway. Who cares about those people who would be put out? The world would be better if it were full of more people like me anyway.

[Lee Kelly]

NOTE: Above, where I wrote "suppose," I meant "support."

[Hume]

Professor Horwitz,

What is (are) the definitive free market health care book(s)? Thanks for any recommendations.

[D.W.]

"What is the likely result if his second proposal were to happen?"

The price of tickets will go up, obviously. But how much will it go up? I don't know exactly. I *think* it would go up almost exactly by the price of checking of one bag.

“But some people don't check any bags” was my initial objection to this answer. But that's only because you have to pay for each bag you check. By incorporating the price of checking one bag into the plane ticket itself, you essentially remove the incentive for *not* checking one bag. So under the proposed rule, almost EVERYONE will check one bag (except maybe those people who like fiddling with overhead compartments).

If this is what happens, then it means no one really wins (the price of checking one bag will remain the same, except now you pay for it with your ticket instead of at the counter) and the people that loose are the people that would probably rather have carried on their luggage for a cheaper ticket price.

At least that’s my guess. What do you think Steve?

[Gary Chartier]

Perhaps not /quite/ by the price of one bag since, subsidy or no subsidy, I prefer not to check bags--I'd rather not wait for them on arrival. But I don't know how many travelers are inclined to do the same.

[Current]

You guys haven't got Ryanair and Michael O'Looney, yet. I hope they come soon that CNN columnist will go purple.

http://www.irishtimes.com/newspaper/breaking/2009/0706/breaking41.htm

[Nicolas]

I don't know in the US but here in Europe the likely outcome is that airline companies would use such measure to ask money to the state. Basically, "we keep the price down but you must help me by giving me subsidies". Otherwise, if there are no subsidies the most likely outcome is an increase in the price of the tickets...

[Steve Horwitz]

Not sure about a health care book, but here's a great column from Ron Bailey at Reason: http://www.reason.com/news/show/135081.html

[Jeffrey Ellis]

I just sent the wife and kids to Ohio for 2 weeks and had to pay extra ($15, each way) for each bag checked. I never stopped to question this pricing arrangement. It's the airline offering the service, so they can offer it however they wish. If I don't like it I can fly another airline. And if it was made mandatory to include the cost of a checked baggage per ticket, then when I fly on an overnighter with carry-on only I'm being charged an unfairly high price for an extra frill I don't need.

[Rafael Guthmann]

This question appears to be pretty complex.

Let's see:

"Questions: what is the likely result if his second proposal were to happen?"

1- A reduction in quantity of tickets traded in the market.
2- A increase in ticket price.

"Who would benefit? Who would lose?"

The decrease in the types of transactions that can be made can hurt everybody.

However, depending on the airline companies, some could like the restriction since it is a restriction of competition.

"Can we say with a high degree of certainty that it
would be a welfare reducer?"

Yes.

[Rafael Guthmann]

"Why or why not?"

Because mutually beneficial transactions that would have taken place without the restrictions are blocked.

"Does it matter that utility is subjective and not inter-personally comparable?"

No because the resulting allocation is pareto inferior to the original.

[Steve Horwitz]

Give Mr. Guthmann an A. :)

[D.W.]

Rafael,

I'm not sure I see how this restricts competition.

I see charging extra for luggage as a form of price discrimination. By forcing everyone to include the price of checking one bag into the price of the ticket, you certainly reduce the airlines ability to appropriate consumer surplus through discriminating between different types of customers, but reduce competition?

Suppose you have two customers, Steve and Rafael. Both are willing to pay at most $200 for a flight to Chicago, but you know that Steve is willing to pay an extra $15 to check his overnight bag, but cheap-skate Rafael is not. So it would make sense to charge Steve extra for checking his bag. By forcing the airline to include the price of checking one bag in the price, they still get that extra $15 from Steve, but may totally loose Rafael's business because of the rise in ticket prices.

But where does this impede competition? Just wondering. Any help would be greatly appreciated.

[Rafael Guthmann]

Steve,
That would be the type of question that I would like to see in a micro test. Here all tests are math, of two types: undergrad math, were you compute equilibrium, and graduate math, were you prove that state x is an equilibrium.

"But where does this impede competition? Just wondering. Any help would be greatly appreciated."

Well, D.W. I mean competition in the "austrian" sense of the term. To restrict the range of contracts that individuals can make is a restriction in the freedom of contract. And these restrictions restrict competition in the same sense that a price controls does.

In the example you gave you showed that one type of mutually beneficial transaction was blocked by the regulation. This restricts the opportunities for profit, and hence, the competitive process. Also, note that in a initial situation were everybody sells tickets with "bag rights", since average ticket costs for the companies became lower if all bag space is used up, them the ones that do not adapt will go bankrupt.

[Steve Horwitz]

Rafael: that question would not be atypical for my intro exams.