Monday, April 02, 2012

An Alphard buying subsidized fuel is rational

Statement: "Look, that Alphard buys a subsidized fuel! Shame, shame, shame!"

Why it is a fallacy: Is it illegal? No? Is it shameful if a rich guy eats in a warung Padang in a kakilima, instead of in a flashy mall? No? Case closed. [On a more serious note: people respond to incentive. It is on every consumer's instinct to find cheaper price. Now you offer two commodities that are close substitutes with significant price gap. It shouldn't be surprising that some people choose to buy the cheaper one, despite the slightly lower quality. My point is, if you let the BBM price shows the scarcity of the oil correctly, hence the price gap not too big between the substitutes, you might see rarer case of subsidized-fuel-drinking Alphards, because now the owners think it is not worth the switch, given the different qualities. So point is: correcting the incentive is more helpful than cursing at the "rational fool" - if you permit the term.

Addendum: a friend @NickyYuventius just tweeted me that the analogy to warung Padang is not accurate, for the warung is not subsidized. He offers another analogy: rich people buys/owns a unit of apartment in rusunawa (subsidized apartment). While it is possible that a designated location for street vendors incl. warung Padang kakilima are subsidized (like those in Solo, so rental fee of space is cheaper), I think his example is more useful. Thanks, Nicky!