The Economics of Charity:
Lessons from San Francisco
3 Jan 2009 in Regulatory Economics
The annual meeting of the American Economic Association should be expected to teach many lessons in economics. Friday's lesson occurred away from the convention hotel.
AtColibrí, a self-described Mexican Bistro in the Union Square neighborhood, the menu says the owners are participating in Healthy San Francisco by adding a 3% fee to the top of every check. Leaving aside the merits of the program itself, does this statement make economic sense?
There are several different ways a restaurant could participate, and the economic implications are very different:
- Colibrí's owners could donate a percentage of gross profits or gross revenues. This would be the most intensive way to participate. Because participation would be a deductible business expense, taxpayers at large would share in the cost. Contributing a percentage of gross revenues is a larger contribution.
- Colibrí's owners could donate a percentage and ask customers to donate a percentage of their own, such as match the owner's percentage. Some customers would do so, thus increasing the total contribution. However, some customers would sense that they were being pressured to contribute and respond in certain predictably adaptive ways. For example, they could reduce the amount they tip so that the total bill remains unchanged. In this case, Colibrí's waiters and waitresses would be involuntary participants, and their implicit contributions could be a cvewry large fraction of income. Under the worst case sceanrio for them, every customer reduces his tip by the percentage contributed to Healthy San Francisco. If the average tip is 19%, then waiters and waitresses would be contributing about 17% of their tips.
- Colibrí's owners could require customer participation by raising their prices by an amount equal to their contribution. Raising prices would deter some customers, and lead others to order less expensive meals, and still others to reduce the amount they tip. But each of these adaptive responses seems likely to be small for small percentage price increases. This approach would make Colibrí's participation anonymous, and to the extent that Colibrí's owners think it is important to be seen to be participating it might be less attractive.
- Colibrí's owners could require customer participation by announcing that they have added a fixed percentage or fixed dollar amount to each check. This is what Colibrí actually does. On the surface, customers have no choice but to participate. If customers felt pressured to participate under option (2) above, this would go away because they would no longer have to decide whether to participate. However, some customers would be angered by the coercion involved. Indeed, the language on the menu makes clear a coercive intent. Some customers would object to being coerced -- including some customers who support Healthy San Francisco -- by deducting 3% from their tips, thereby shifting the cost of forced participation to waiters and waitresses.
Of the four ways for Colibrí's owners, to participate in Healthy San Francisco, the way they have chosen to do so minimizes the actual cost of their participation by shifting virtually all of it to customers and employees.
Employees are not necessarily worse off, however, because Colibrí may be participating in the City Option. Only if Colibrí has 19 or fewer employees is participation free. All other employers have to pay health care costs ranging from $1.17 to $1.85 per hour. By "participating" in the program via an implicit tax on restaurant meals, Colibrí's owners may simply be trying to shift the cost of this employer mandate to their customers.
As a final note, it is essential to drop the mask of neutrality briefly to point out that Colibrí is a delightful restaurant with superb cuisine and excellent service. The Pozole Verde (chicken and hominy soup, Sinaloa style, with jalapeño chile, tomatillo, and spices, topped with radish, lettuce and onion; $13) and Brocheta de Filete (ancho chile marinated filet mignon tips in a skewer with seasonal vegetables, oaxaca cheese and guajillo salsa, $14) is highly recommended by your faithful economics correspondent.
I encourage fellow economists attending the AEA meetings to go there for lunch or dinner. It's a mere two block walk from the Hilton San Francisco.
"Healthy San Francisco is a program implemented by the City that enforces health care to be accessible to all and Colibrí is a proud participant. A 3% fee will be added to your bill for a Healthy San Francisco, to learn more about this program please visit www.healthysanfrancisco.org."
