Saturday, April 17, 2010

Paying for What You Use

The recent Spirit airline policy of charging for luggage that is stored in the overhead compartment made me think of what is the future going to look like. I actually support this policy greatly, unlike our politicians and some of the uninformed public. At the end of the day, the ideal scenario is one where each of us pay's for the resources that we consume and minimize the payment for resources that we don't consume. In more tangible terms, instead of looking at this airline policy as one where the consumer pays for his or her use of the overhead compartment, it really means that you are NOT paying for the lack of usage of the overhead compartment. In essence, the price of my ticket is now cheaper and if I don't use the overhead compartment, I have saved money relative to the previous policy where the overall usage of compartments is cost that is amortized across all passengers.

Let me generalize this concept. Paying for only what consumers consume seems like the obvious right thing to do, but yet, it is not practiced in many businesses and governments. For example, should I pay more taxes if I called 911 more often than another person who did not call 911? I would indeed prefer that.

However, now playing the side of the consumer who does consume the overhead compartment. I would now be spending more since the total cost of my ticket is base fee + overhead compartment usage fee. This total cost would very likely be greater than the ticket fee in place without this policy since now instead of amortizing the cost across all passengers, the cost is imposed specifically on those who use the service.

What I am concluding is that there is a significant economic trade-off that businesses need to continually analyze in order to decide how to structure these "pay for what you use" policies. If the majority of consumers use the service, then this policy may be less attractive to the majority, however, if a minority of consumers use the service, the policy starts becoming attractive since the majority will see a cost reduction.

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