Thursday, June 23, 2011

State of Texas (and other States) has a wealth-redistribution scheme I 100% approve of...I think "UWILL2"...

I did not know Texas was doing this, but what a great idea---auctioning off vanity plates to the highest bidder:

What Drives People to Take a Creative License?
""To boost state coffers, Texas sold a Dallas doctor a "PORSCHE" for $7,500.  Then it sold him "AMERICA" for $3,000.

Both were license plates, sold at auction. "I will get my American citizenship next month, so it means a lot to me," says Salman Waheed, an intensive-care physician. He also wanted "FERRARI," but dropped out when bidding for that one went too high—eventually netting $15,000, the top price paid.

After years of selling vanity plates as a modest sideline—charging as little as $5—states think there's more money to be made in whatever drives people to buy them. Facing budget crunches, states are raising surcharges or proposing annual fee hikes for custom plates.
Texas has gone a step further. It hired a private company to raise $25 million over the next five years by auctioning off vanity plates. "People like to express themselves, especially in Texas," says a spokesperson for the Texas Department of Motor Vehicles. This year, at the nation's first such auction, Texas sold 33 plates for $139,400...""
Nobody gets hurt and people pay what they believe the plate is worth to them. Vanity plates are a "want" and not a "need".

This illustrates the microeconomic concept of Consumer Surplus and how a business, or government, can increase its revenues by segregating its customers by their willingness to pay.

Below is a demand curve for the market for vanity plates. I am keeping it very simple with the numbers just to illustrate the concept.  Assume that the state does not charge much more for a vanity plate relative to a "regular" license plate.  Assume the price charged by the state is $100 and they sell 3 license plates total (vanity and non-vanity). 

The total revenue from the sale of license plates is $300.  But we know from our market demand curve that someone was "willing and able" to pay $300 and someone else was "willing and able" to pay $200 for vanity plate. The 3rd buyer did not want a vanity plate, just a regular one so she paid $100.  See graph below. However, buyers 1 and 2 did not have to pay a higher price because the price set by the government was $100 and they could get the plate cheaper than what they were willing to pay.  They retain significant Consumer Surplus.  NICE DEAL FOR THEM!!
Would it not be great to extract some money from these vain people?  In this particular market, according to the article, it is easy to segment customers. Texas is doing this through an auction system.  The state can still sell 3 license plates, but they can transfer that Consumer Surplus from the buyers to the state.  See the graph below for the math in how revenues to the state are affected.
This is a "wealth-redistribution" scheme that I approve of 100%. 

I bet I could get "HAYWARDECON" very cheap!! What do you think?? :)
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