I was recently at Costco, by far my favorite place to shop, when I couldn't help but notice economics at work. There are many perks to shopping at Costco, of which my favorites were the samples (pre-covid of course) and the inexpensive food court. I have been going to Costco since I was a child and one thing I have always enjoyed is the hot dogs they sell. For only $1.50 you can get a hot dog and a drink. I thought this price was low when I was young, and as I have aged the price of a hot dog has remained constant at $1.50. I have always been puzzled as to why they would sell this and give their members so much consumer surplus.
The answer finally came to me during my last visit, externalities! While Costco is certainly losing some money each time they sell a hot dog, they are gaining more than that because of the positive externality that is created with consumption. The atmosphere created by having lots of happy customers enjoying their consumer surplus makes shoppers happy to spend more money on other items at the store due to the savings they just enjoyed on their lunch. It also makes people happier to go to the grocery store because the hot dog serves as the light at the end of the tunnel for many food loving shoppers such as myself. I hope Costco understands how large this externality is for me and countless others and never takes away from the consumer surplus I enjoy with every visit.
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