In-perspective: Variable deductions for Pearl

- Ronak Sisodia , Economics Association

2017-03-04

Technical

After all the banter and criticism about the Variable Mess Fund Deduction, let's take a step back and take a look at it from an unbiased policy perspective. We'll also see how the chain of events that followed the announcement of Variable deductions from the mess fund for individuals were in line with what has been predicted and explained by existing theories. Some aspects of the issue have been knowingly skipped to focus purely on policy and refrain from discussing politics.

Required Jargon

1. A public good is non-rival and non- excludable.
2. If a good has non-rival characteristics, once provided, the additional resource cost of another person enjoying the good is zero.
3. If a good has non-excludable characteristics, preventing someone from consuming the good is either very expensive or impossible.
For example : National Defense- Just verify the above public good characteristics in national defence and we will be good to go.

: Pearl- It surely has non rival traits. (The more the merrier!) But we can observe that it can be both excludable as well as non-excludable. Pearl is a renowned brand. Everyone is equally likely to benefit from being associated with it. A price cannot be put on the pride of being a BITSian. But if price is put for attending an event or a show, we are depriving them of some amount of welfare associated with watching a show. We are excluding them from availing the services.

The Problem: Pearl Mess Deduction as a Public Good

Let's describe the problem in hand. For public goods, unlike private goods, people tend to hide the true value they place on the good. The market price doesn't reflect the true value of the good. Since the price is low, the good remains under-produced and hence under- consumed.
When people hide the true preferences, market can’t reach efficient solution. Did people reveal their true preferences during the GBM? We find out.

During the GBM on February 18, less than 35% people opted for 750 ₹ mess deduction. Entry to Bollywood night was free in both of the choices presented. So even if some of the students were willing to pay, they had no incentive to do so. And hence no efficient solution was reached. During the GBM on February 20, SU announced a measure that was nearly perfect. Let's find out what it was.

The Solution: Variable Mess Deduction as Perfect Price Discrimination

Since the Bollywood night is non- ticketed, the problem of the Free rider arises. Free rider is someone who has the incentive to let other people pay for a public good while (s)he enjoys the benefits.
One of the efficient solution to avoid free rider problem is – Perfect price discrimination. It means to charge different prices for different people. These variable charges are decided on the basis of true preferences of consumers (here: students).

As a very good application of price discrimination, SU came up with a solution – pay what you seem as just. Three options were given. Based on our interests and willingness, we could choose option that maximized our utility (here, fair value for deducted money). Although SU incur almost zero additional cost in allowing everyone to attend shows and events for free; they can't break even (no profit, no loss) then. But if they charge students, based on their interests and willingness to pay, they can certainly generate profits and efficient solutions can be reached.

Why is this solution supposed to work?

Based on experimental research:
– Cooperation is fostered by prior communication.
– Contribution rates increase when opportunity cost of not giving, goes up.
– People may derive a “Warm-glow” feeling of satisfaction from giving.

This was observed in practice as:
The GBMs on 18th Feb & 20th Feb, SU communicated with general body. This, along with the online communication, changed the preconceived notion of students.
Choosing ZERO mess deduction had a relatively high opportunity cost. Enjoyment during EDM night, comedy night and the fun of participation in events seemed to weigh more than 550 deduction. So again, from perspective of maximizing utility, it made sense to pay.
Since we are equally likely to benefit from a bigger and better fest, we tend to get satisfaction by contributing our part. It gives a feeling of pride to enjoy what WE earn.

Did it actually work? Statistical support

Less than 30% students on campus opted for zero or 550 ₹ mess deduction. In contrast, in GBM dated on 18th Feb more than 70 % people in attendance were inclined to not pay 750 ₹. Clearly communication played a significant role. Once the SU conveyed the benefits of the differentiated prices by explaining why they are doing what they are doing, the prejudice of general body changed. In line with the improvements and efforts by SU 2016-17, general body is confident about their commitment.
Just like a democratic government, the SU is “Of the people, for the people and by the people”. For an efficient and effective working of the economy the opposition (here: general body) plays their part. SU is responsible to cater to what majority of people wants. As preferences vary, it becomes difficult to satisfy everyone. As necessity is the mother of invention, SU came up with a new measure that is tailored to satisfy all.

The welfare of BPHC has surely increased.