Monday, August 17, 2009

Auctions, Scarcity & Hot Dogs

Would you believe that it costs 54K USD/month in rent for a hotdog stand outside the Met in NYC? (TheBSReport):

Sherpa agreed late last year to pay almost $643,000 annually for the right to sell food and drinks from carts on either side of the Met’s entrance.
What's cool about this story is that it's illustrative of a number of economics ideas complete with pirates and a black market, a government granted monopoly and the advantage of auctions. First the scarcity and the government granted monopoly (Slate):
Rent is set at auction (with vendors battling it out) rather than by the city ... (The museum attracts 5 million visitors a year, and the hot dog stands are the only food outlets for blocks.) Last year's occupant paid $415,000 a year for the Met stands plus at least $25,000 for supplies and labor, and didn't go under—so we can assume he brought in significantly more than $440,000.
They compete with vendors on the streets who purchase permits instead of bidding on them at auction:
They don't have to pay rent for specific spots; their only real estate expense is the cart permit the city requires them to buy. Theoretically, that'll put you back just $200 a year. But since the city caps the number of food vendor permits at 3,100, far below demand, there's an extensive black market. Some companies buy up the permits for dozens of carts and then lease them to individual vendors at highly inflated prices.
But because of the scarcity and significant incentives, there are pirates:

“As soon as they pulled Sherpa’s cart out yesterday, all these guys just pulled in. The city has to enforce the law,” said Rossi.

These unlicensed dealers offer dogs and drinks for less money than the legit businessmen, whose prices are set by the Parks Department.

Of course it's not so much fun for the vendor who was evicted and fell behind on his rent, but it's amazing how effective auctions of government monopolies can be at soaking up all economic profits.

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