Monday, September 09, 2019

Free lattes at Hot Cakes - an optimal club?

Currently Hot Cakes in Barracks is running their biannual promotion of two weeks of daily free lattes to UVA faculty, students, and staff. Free coffee and wifi, no questions asked. However, this is not a purely public good, as it is restricted to those affiliated with the University. As Buchanan notes, traditional economic analysis only distinguishes between private and public goods, and not clubs that not everyone has the opportunity to be a part of. The key to determining the optimality of a club is whether the marginal rate of substitution (MRS) of consuming the good is equal to the MRS of producing the good. My utility from consuming the free coffee and wifi is very high - this is one of my favorite times of the year. However, for Hot Cakes this does not seem to be a profitable venture. They get free advertising, but I don't know of many people that regularly visit Hot Cakes year round. They get lots of people in their store, but no one that I know regularly buys additional items from Hot Cakes. Conversely, this is provided at presumably great cost to Hot Cakes. The costs and benefits do not seem to be in line with each other, which makes for a sub-optimal club according to Buchanan.

No comments: