The Undercover Economist

Morning Coffee and Scarcity

Commuters pay a stiff premium to buy morning cups of coffee from the train station kiosk. The reason is scarcity. Usually only one vendor has a kiosk in the station, although the extra price commuters pay probably does not even go to the vendor. The one who really controls this scarce resource is the owner of the real estate where the kiosk sits. This is a pattern.

In the nineteenth century, economist David Ricardo analyzed the role of scarcity in pricing. He offered the example of a region rich in fertile land but sparsely settled. Land owners could not charge high rents, because land was abundant and farmers were few. However, in this situation, one would expect many more farmers to move in, searching for cheap land. Eventually, so many farmers would arrive that land would become a scarce resource. Then, landlords could charge higher rents. More interestingly, farmers would probably begin to plow nearby marginal, less desirable, less fertile land, bearing cheaper rents. As this happened, rents on the marginal land would rise, particularly as new farmers began to compete for it. However, in this instance, rents on the prime meadowland would...