Wednesday, June 24, 2009

Looking at corollary behavior to answer an age-old question

I'm one of those people who believe in the free market and the invisible hand and all that, and there's a question that's been bugging me for years. Some governments have seen fit to mandate that all bars be non-smoking, for the convenience of non-smokers. However, if the majority of people are non-smoking, it seems intuitive that even without government regulation, some bars would open up that would cater to non-smokers. However, that did not happen, and I always wondered why.

Then I read Outside the Beltway, which linked to a post of Megan McArdle. McArdle also wondered why the free market didn't produce non-smoking bars, but then realized the answer:

You can explain it through preference asymmetry and the profitability of various customer classes: heavy drinkers are more likely to also be heavy smokers, and they are the most profitable customers. Bar owners don't want big groups of people who are going to take up three tables for an hour and a half while nursing one white wine spritzer apiece. They want people who are there to drink. In a competitive equilibrium, they couldn't afford to go non-smoking because they'd lose their most profitable customers to all the other bars.

Yet another example of intuition gone awry.
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