A few weeks ago was the time of year that many of us were waking up in roadside bushes with a throbbing headache and naked from the waist down. Yes, the time of society launch parties had come around again with their gilded offer of free liquor.
With a guarantee of a good night for even the most socially declining person, no one doubts their nights were fun. But were they optimal?
In concise terms, bar tabs create socially suboptimal behaviours through a massive change in incentives. Two large moral hazards are created due to the fact that what was once expensive; is now free. Firstly, due to the limit of the tab, consumers are likely to drink more alcohol, more quickly. People, though probably subconsciously, actually compete in a game like structure against the other patrons, where drinking as quickly as possible gives the highest individual return.
Secondly, the issue of hoarding drinks is created. Consumers are more likely to order the maximum number of drinks allowable; even if there is a large probability they won’t be imbibed. As there is no additional cost in ordering more drinks than normal, the incentive is to order as much as possible, reducing the resources of the bar tab in a typical tragedy of the commons type problem.
Both these issues lead to the following.
· The tab running out much faster than optimal.
· Drinks being left untouched or only partially drunk.
· Overly drunk party goers from people going too hard and too fast in the beginning.
But now, don’t fret; there are solutions to the madness. Let’s have a look at some ways we can use economics to try and ease the problems of excess.
The first possible solution is to run a staunch protectionist regime and implement an embargo on trade at the bar. By limiting the amount of drinks available to a single person to a much smaller number (say 1 or 2) it is possible to partially control the speed of which the bar tab runs down.
This partially removes the problem of hoarding by implementing a new cost of time to get the marginal drinks. The embargo forces hoarders to line up in the bar line to get the extra drinks, pricing some consumers out of the market.
This is not a perfect system though as it has erroneous consequences that can impact those who were earnestly ordering extra drinks. Getting a round for your mates becomes illegal in this system, which could overall reduce net social benefit by having a lot of pissed off people at your party.
Another solution to the madness could be to introduce transferrable trading credits, upon entry, in the form of a drinks card. The drinks card would entitle the holder to a certain number of drinks, which gives a more equitable distribution of the bar tab.
By assigning a consumer individual responsibility over their drinks, consumers will act a lot more optimally in regards to the timing and quantity of their drinks.
These drink credits would be freely transferrable which gives an indirect bonus to us economics nerds as we watch the market for drink credits develop throughout the night.
The downfall of this system is the uncertainty of the number of consumers in the market. For the system to work optimally, the organiser would need perfect information on how many people will require drink credits on the night. An incorrect assumption of people attending will lead either too many or little credits being distributed. The former leading to pissed off sober people, the latter leading to the same original problems of a normal bar tab. Of course, the market, on a long enough timeline will correct this but it is unlikely there will be time enough for the market to reach equilibrium in one night.
The final solution considered here would be that of host society subsidising consumers’ drinks. For the purpose of simplicity, we’ll consider the scenario where the society sets its subsidy equal with the amount of tax paid per drink. This leads to a market where consumers are paying the price that they normally would in a free market.
This will definitely slow down the rate at which people buy their drinks, especially at the start of the night. However, we also have to assume that the level of the tab is finite so there will still be elements of the game where people compete to receive as much as the bar tab as possible. So, close, but not perfect.
With the issue of hoarding drinks, this solution is closest to optimal as we can assume. The free market price of the drink should lead to the optimal amount of drinks being purchased at any one time. Again the issue of the finite bar tab playing on incentives slightly will change incentives but it is likely the effect will be minimal.
An interesting consequence of this subsidy is that the host society is essentially transferring a lump sum to the government in order for them to have this party. On a micro level looking at each consumer’s purchase, the tax can seem justifiable by constructively changing their behaviour. On a macro level, looking at this transfer from the society to the government (with the bar as the middle man) seems a little…wrong.
Anyway, we’ve had a look at some potential new ways for societies to run their launch parties from here on out. None of the three were perfect, though most looked to improve on the current situation. Either way, I know I’d be happy to keep increasing my sample size, trying to find that perfect bar tab structure until the university finally forces me to graduate.