The best economists are enamored with markets.  Those in the Edgeworth Economics office are no different.  Yet recently we observed a serious market failure right here at Edgeworth … a continuously empty coffee pot.  Edgeworth economists (like employees in most offices) have high demand for morning joe.  However, despite a large bag of dark-roast and a coffee maker in our kitchen, why doesn’t coffee supply meet demand?

The heart of the market failure is that coffee is essentially treated as a public good at Edgeworth Economics.  Because the coffee maker resides openly in the kitchen, once a pot is made every economist has access and it is rapidly consumed.  The poor economist who made the coffee might not even get a chance for a cup before the coffee is fully consumed by the other economists.  This ability of the masses to free ride off the lone coffee brewer creates a significant disincentive to make coffee.  The result is high demand coupled with hardly any supply… along with very groggy economists.

But there is hope!  First, a price mechanism could be established to transfer the public nature of the Edgeworth coffee pot into a more private one.  Instead of having free coffee, we could charge with daily proceeds given to the coffee maker.  One difficulty here is determining appropriate price.  A nominal price (such as a nickel or dime) provides little incentive to make the coffee and the market failure persists.  A higher price must be sufficiently low to keep individuals from heading down to our local Starbucks (although the one nearest us recently closed, spawning the topic of a future EDGEwords post – The Economics of Cursed Locations).

At the other end of the continuum is the interventionist approach.  Collectively, we make each economist take a turn and sign up for their day to make coffee.  This approach may be marked by typical problems with intervention, for instance, inefficient resource allocation (some people just make really bad coffee). 

An alternative theory is to do away with the public nature of the market altogether (no need for a price mechanism or intervention), by getting a fancy Keurig brewing system where everyone has to make their own cup (you are your own demand and supply).  For now, however, our approach is reputation based – the wonderful person who makes the coffee in the morning receives accolades and praise from the rest of the office.  Hmmm … maybe this is why the pot is always empty.