Who created the scarcity?

We all know that buying coffee in a city center cafe or eating in a tourist attraction is often more expensive. This is not difficult to explain, because the land is relatively scarce and the cost is high. But who is responsible for the scarcity of land? Recently, there is a reprint of a classic book called "Undercover Economics". The author is Tim Harford, who once served as an economics professor at Oxford University. In this book, he answers the question "Who creates scarcity?"

Harford said in the book that there are two causes of scarcity, one is natural and the other is man-made. Artificial scarcity is easier to understand. For example, businesses will deliberately create scarcity to make consumers pay. For example, first-class seats on airplanes are several times more expensive than ordinary seats. This is because airlines want rich people to buy high-priced tickets, so they try their best to make the best services look scarce.

What is natural scarcity?

Suppose you bought a cup of Starbucks on your way to work. Who made the money for this cup of coffee? Is he the owner of Starbucks? In fact, he only made a small profit. Starbucks is expensive not only because of its quality and service, but also because of the location of the store. Shops in good locations are scarce resources. Businesses that rent out shops will usually sign an exclusive agreement with a coffee shop, which means that a second coffee shop is not allowed in the nearby row of shops. At this time, store resources are scarce, but there are many businesses operating coffee houses, so the final rent will be so high that it offsets most of the profits of the coffee houses. In other words, for every cup of Starbucks we buy, most of the money actually goes to the owner of the store.

So why are some locations scarce? This involves an economic theory, Ricardo’s marginal land theory. Suppose there is a remote town with few immigrants but lots of fertile land. One day, a farmer came to this small town and wanted to rent 100 acres of fertile land to grow food. Although the landowners all know how much 100 acres of grain can be sold for, they don't know how much rent they should charge the farmer, because there is a lot of fertile land and every landowner wants to rent it to the farmer. The result is that farmers can rent fertile land for very little money. Here, we see the power of scarcity again. Those who control resources may not necessarily make money. Pricing power comes from scarcity. Farmers are scarce, but there is a lot of fertile land, so landowners have no pricing power.

If there are more and more immigrants in this town, the fertile land will become less and less until there is no fertile land left. At this time, the situation will be reversed. Fertile land becomes a scarce resource. Landowners naturally have the right to set prices, so they can increase land rents. To what extent? This depends on the value of the marginal land. Assume that the yield of fertile land is 400 kilograms of grain per acre, while the grain yield of relatively barren land is 300 kilograms. The difference between them is 100 kilograms. If a kilogram of grain costs 1 yuan, then the rent of fertile land should be 100 yuan. The barren land here is "marginal land" in the economic model, that is, land that can be planted or not. The rent of fertile land is the difference with the marginal land income.

Of course, marginal land is not constant. In the beginning, only a few farmers came to the town, and the fertile land was marginal land because all farmers could farm it. When there are more and more farmers and fertile land becomes scarce, relatively barren land becomes marginal land. At this time, fertile land will begin to collect rent. If later there are not even enough relatively poor lands, the poorer lands will become marginal lands. Relatively poor land will also charge rent, while the rent of fertile land will increase.

After talking about Ricardo’s marginal land theory, let’s return to the problem of coffee houses. What determines the price of a lot? A coffee house in a good location is equivalent to fertile land. Consumers are willing to pay a high price for a coffee house in a good location, so the rent in a good location will be high. How much higher? It is approximately the difference from the marginal store product value. Therefore, the reason why Starbucks is expensive, in addition to factors such as quality and service, is mainly because of the scarcity of locations; the reason why locations are scarce is because consumers are willing to pay high prices to buy coffee in this location.