I recently talked about a Southwest Airlines policy regarding passengers who require the use of more than one seat, and how it provided a good opportunity to visit one of David Henderson’s Ten Pillars of Economic Wisdom – there ain’t no such thing as a free lunch. But it also occurred to me there’s another item on the list that’s relevant to these kinds of seating policies. One might think that a person who uses two seats should pay for two seats, because they are using twice as many resource units as a person who only occupies one seat. But understanding another pillar of economic wisdom reveals a somewhat more subtle take.
The third pillar is “Economic thinking is thinking on the margin.” For example, in the perfect competition model, we say that the price of a widget will be equal to its marginal cost. The marginal cost of a widget is how much it would cost the company to produce one more widget. Thinking on the margin means thinking about things in terms of the next available unit. Adam Smith was puzzled by the fact that something essential like water was inexpensive but something frivolous like diamonds could be very expensive indeed. The so-called diamond-water paradox is explained by thinking on the margin:
The marginalist explanation is as follows: The total utility or satisfaction of water exceeds that of diamonds. We would all rather do without diamonds than without water. But almost all of us would prefer to win a prize of a diamond rather than an additional bucket of water. To make this last choice, we ask ourselves not whether diamonds or water give more satisfaction in total, but whether one more diamond gives greater additional satisfaction than one more bucket of water. For this marginal utility question, our answer will depend on how much of each we already have. Though the first units of water we consume every month are of enormous value to us, the last units are not. The utility of additional (or marginal) units continues to decrease as we consume more and more.
In my original post, I mentioned that part of the cost of occupying two seats is the opportunity cost – by taking up two seats, you are preventing someone else who had travel plans from having a seat as well. And I mentioned that aside from Southwest, the general policy is for people who occupy two seats to pay for two seats. But there is an additional factor I didn’t talk about.
With these airlines, the policy also states that if the flight was anything other than full when the plane takes off, then the passenger who had to buy two tickets will be refunded for the cost of the second ticket. And thinking on the margin, this makes sense. If the flight was full, then the second seat this passenger used could have been a seat that was available for another traveler. In this case, the passenger using two seats displaces the travel opportunity of another potential passenger and costs the airline the opportunity to sell another ticket, so the marginal value of that second seat is one seat. But if there is even a single empty seat on the plane, the margins change. In this case, occupying that second seat didn’t displace a potential traveler, because the marginal potential traveler could have taken the empty seat instead. And when this is the case, the airline will retroactively reprice the second ticket as being equal to its marginal cost – that is, by refunding the second ticket, they retroactively change the price of the second ticket to zero.
So it’s not quite the case that a person who uses two units of a resource should pay twice the price of a person who uses one unit. Thinking on the margin leads to a slightly more nuanced take. Instead, the idea is that someone who uses an additional unit of a good should also pay the marginal cost of the second unit. Often, the marginal cost of the second airplane seat is a second airplane ticket. But, sometimes the marginal cost of the second seat turns out to be zero, and when that is the case, most airlines do in fact set the price of the second seat to be equal to its marginal cost.
