The Undercover Economist - Part I - Who Pays for Your Coffee

Strength From Scarcity

- AMT (The coffee shack @ Waterloo station) has the power to charge high prices because of the scarce location of the coffee kiosk

- Network Rail has the power to charge high rents because there is only one location and many companiess are eager to sell coffee there



David Ricardo and "Marginal Land"

- Prime coffee-bar locations will command high rents only if customers will pay high prices for coffee

- There is no absolute value for rent, everything is relative to the "marginal land"

- The coffee-kiosk is not an optimal location for selling 2nd hand cars or noodles (have no shortage in better alternative); yet, cheaper rent at other locations for selling coffee will not be sufficient to compensate for sales volumes generated from floods of price-insensitive customers





Different Reasons for High Rent

1. It's worth paying a lot for good land, because the grain that good land produces is so valuable.

2. Because the alternative that should be available are not (e.g., London's Green Belt restriction)

- "sustainable competitive advantage" (have edge over the competition that will produce profits year in and year out)

- "rent seeking" (avoid competition from others)

- Effectiveness of an organization - creates barriers to entry and sustainable profits

Conspiracies against the laity

- Unions, professional organizations etc.

- Immigration of cheap labour (well-educated workers welcome immigration, poorly educated workers resist immigration)