Amazing how the price of something is the price of something, isn\’t it?

This story brought a chuckle:

With cash-strapped councils cutting subsidies, companies are dropping unprofitable services across the country.

Now, as an alternative, passengers are being “invited” to contribute towards the cost of their journey if they hold a bus pass which would normally give them free off peak bus travel.

You can declare that something is free but in the end it always seems to end up costing what something costs.

Funny that really.

21 thoughts on “Amazing how the price of something is the price of something, isn\’t it?”

  1. Not really true across many goods though, is it? How much does a new album ‘cost’? I’ve hardly ever seen them sold at cost . Even a bus ride is tricky – an extra passenger must cost a tiny amount of fuel.

  2. Indeed Matthew2, it is very tricky. I suspect that it is so tricky that no person, or group of people can actually have enough information to work out the correct price of goods and services. Its almost as if we ought to leave prices to the wisdom of the crowds by allowing people to freely trade in goods and services at prices agreed to between buyer and seller.

  3. ChrisM might be on to something, you know. People wouldn’t get prices right individually, any more than institutions do. But the little nudges up and down they would supply collectively to correct the errors would keep prices hovering in the right sort of region, rather than being set too high or too low for ages, creating all sorts of supply or demand problems.

  4. Matthew2 – you’re getting price and cost mixed up. You’re also thinking that the only cost that a user of a service should pay is the incremental cost of them using the service and that somehow magically all the other, much larger costs, will be met by someone else and that the operator should not make a profit. You’re on the wrong blog!

  5. @Matthew2: on that basis I hope you never get on a bus and are the only passenger, as you will be liable for all the costs of the entire journey. Fuel, driver’s wages, insurance, bus maintenance etc etc.

    Or are you hoping (as botzarelli says) that ‘someone else’ will foot the bill if you are the only passenger?

  6. He’s not on the wrong blog for marginal cost pricing theory, he’s just applying it in an unsuitable situation.

    It only really works where there is lots of competition, excess provision and minimal differentiation between suppliers. None of which really apply here.

  7. What strange responses – I said nothing about not making a profit, or not using the market etc etc.

    Peter in particular just seems to open up blog comments and press control-v of a stock response he has prepared for anything.

    Jim even seems to think it’s a moral issue and I’ve crossed the line. His ‘average cost pricing’ suggest I’m afraid would make most businesses go out business quite quickly.

  8. I think it says more about ‘everyone here’. But maybe I’m being unfair – why did you think it was a cry for State interference?

    I must say the more I think about it the idea that all consumers should pay the average cost of something is really strange and I think perhaps Botzareli/Jim are on the wrong blog.

  9. Well it could be that you were crystal clear, and everyone else was at fault I guess.

    To be fair to you, you didn’t call for state interference. It was not altogether clear what your point was though either. (Well not to me and a number of others).

    I don’t think that Botzareli/Jim were calling for every customer to pay exactly the average cost of something. They were however (rightly) refuting your implication that people should only pay the incremental cost ” Even a bus ride is tricky – an extra passenger must cost a tiny amount of fuel.” By and large customers do end up paying closer to the average cost, than they do the incremental cost.

    I am sure they can correct me if I have misunderstood them though.

  10. Just to be picky, prices aren’t set by costs, costs are set by prices. It’s the Labour Theory Of Value fallacy, that danged Adam Smith again.

    You can have a zero priced bus, so long as you can get everyone in the production chain to work for zero wages, zero profits, zero rents, etc. The costs of a zero priced bus are zero.

    The trouble is finding anyone to work for zero, but presumably you can find some idiot communists to do it, it’ll happen. See, for instance, Firefox and much other open source software. Producers with a higher-than-zero minimum price don’t get a job.

  11. But there was no such implication. I made the (to me obvious and free-market) point that ‘cost’ is not easy to measure, obviously so with respect to digital albums but also with – the point in question – bus fares.

    e..g If I book a seat on MegaBus tomorrow, I can pay £2 if I leave at 21:30, or £10 if I leave at 18:30. That is not pricing based on changing costs.

    In fact in principle if your marginal cost of providing a good is very low, you should be willing to set a very low price if that is the only way to fill the bus. The problem of course is stopping everyone paying that amount.

  12. But a producer doesn’t just need to recoup their marginal costs, they need to recoup all their costs. The marginal cost a a drug company banging out another pill might be fractions of a pence, but they still have to recoup the billion or so they sunk into developing the pill. Ignoring those costs does not make them go away.

  13. I would have though the cost of providing goods and services is actually quite easy to work out. Crudely surely it is Turnover – Profit ?

  14. Just to be picky, prices aren’t set by costs, costs are set by prices.

    Just to be pedantic, costs are just prices at an earlier stage of production.
    Prices are set by the intersection of supply and demand, which of course includes the demand for that product in as an input to other products, which in turn is affected by the price of that product.

  15. Ian B,

    The trouble is finding anyone to work for zero, but presumably you can find some idiot communists to do it, it’ll happen. See, for instance, Firefox and much other open source software. Producers with a higher-than-zero minimum price don’t get a job.

    Most of the work on Firefox, Linux, Open Solaris, Android and MySQL and Python is done by professionals.

    My own open source contributions were fixes to bugs, which I supplied back to the team because I’d prefer not to have to apply them again. And there’s at least another 15 financial reasons for doing open source software.

  16. “Ignoring those costs does not make them go away.”

    Of course not, but selling something above its marginal cost is better than not selling it at all.

  17. “Of course not, but selling something above its marginal cost is better than not selling it at all.”

    This is far from universally true, and is probably not even true most of the time. If customers could always bank on offering just above the marginal cost, knowing that suppliers would accept that offer, the suppliers wouldn’t be able to sell much at the full price – ie a price that most customer needs to pay to cover ALL the suppliers costs.

  18. guys….sellers try to set prices and they can do it by all sorts of linkages to costs but, at the end of the day, buyers determine whether they will buy at those prices. If a buyer will not pay the price that you need to as a seller to recover your costs, then you have to stop supplying that product.

    In this ncase, a subsidy is obscuring the true price that the bus company wants to charge. once the subsidy is withdrawn, people can decide whether or not it makes sense to take that bus trip.

  19. “Of course not, but selling something above its marginal cost is better than not selling it at all.”

    Not at all. Take my business. I make hay in small bales for people to feed to their horses. The marginal cost of producing 1 extra bale is virtually zero – a very small amount of fuel, about 3 pence worth of string, and 10 seconds worth of wages for the tractor driver. But I’ve got £100K worth of machinery lying around that’s necessary to be there to make 100 bales or 100,000. So there is no way I can sell any of my product at the marginal cost of production, and still make a profit anyway.

    Of course it may be that as diogenes says, customers are not prepared to pay as high a price as I require to remain profitable, and I will have to stop production.

    But if I sold at the marginal cost I’d be bust straight away.

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