How much should a flight cost?

Economists are often accused of thinking about money/the bottom line, etc., and not about people. 

Another claim is that economics is a rather simple science (if it is one at all) and that anyone with common sense understands it (or, alternatively, that economics is not a science but merely opinions). 

"The El Al "storm" provides an opportunity to discuss economics and its role in our lives. 

With the publication of the financial reports, it turned out that El Al earned quite a bit of money by continuing to fly during the war, while other companies refused to fly to Israel. El Al charged a higher price for the flights and therefore also earned more. 

Early disclosure: I have no connection to El Al other than that I have not yet received a refund for a ticket canceled due to Corona, and I was supposed to receive the credit over a year ago. This doesn't matter, El Al is just an example for the sake of discussion. Many other examples can be found in the field of vegetables, transportation, medicine, or indeed in any other field. 

See, for example, the words of a leading (non-financial) media personality:  

or the newspaper headline (financial):

Intuitively, it's really annoying. Someone is left alone in the market because a war started and then they "take advantage" of the situation and raise prices.

First, should the anger be directed at the company that continued to fly? It's a bit like the beginning of a meeting where a third of the attendees don't show up, and then the manager begins angrily addressing those in front of him, those who *did* arrive. If one wants to be angry at someone, maybe it should be at the companies that stopped flying? Never mind, let's get back to the discussion. We're not here to be angry at anyone (except for whoever hasn't repaid my COVID debt). 

Suppose there are 1,500 people in New York who want to go to Israel, and there are only 500 seats on the flight. How do we decide who gets on the plane?

Accepted methods to do this: 

1. First come, first served. Registration opens. First to buy, first in. 500 inside, 1000 outside. 
2. Raffle. 1500 want. 500 can. Let's do a raffle. 
3. A committee that will determine who really needs to fly right now. In addition, of course, an appeals committee to review the decisions of the first committee. 

Of course, it's possible to combine methods. For example, a lottery only among those deemed eligible by the eligibility committee, and so on. Each method is used in different places. For example, a combination of eligibility and lottery is the basis for providing a discount voucher of over a million shekels in the 'Price for the Occupant" project. Eligibility based on place of residence allows for an income tax discount.

A first-time buyer is inside and others are outside, which is how you buy a movie ticket. 

No matter how we turn things, we'll end up with 1,000 disappointed people. When an economist looks at the problem, they tell themselves, "I know I have to disappoint 1,000 people in the first stage, but I'm looking for a method that:" 
A. Do not only consider the quantity of disappointments, but also the quality of the disappointment. There is a difference between being disappointed by arriving home a day later after a trip, and arriving a day later when, on that very day, your wife announced she was in early labor. 

B. Address the number of disappointed people not only today but in general, and not only today but also the next time a similar event occurs. 

c. Address the quality of life of people even in routine times.

 The emphasis here is that an economist, having been trained in the Social Sciences Department of the university, always strives to maximize welfare, not profit. Want to maximize profit? Go into accounting in the Management Department :). I also recommend this in private life. Seek well-being, not profit. But that's for another article. The economist says to himself, "On one hand, I have a benefit: a direct flight from the US to Israel, and on the other hand, a cost: the price to be paid for the flight." Ostensibly, the flight is a product with uniform benefit for everyone. In practice, for the person whose wife has gone into labor, the flight has a much greater benefit than for the person who was initially debating whether to stay an extra day in New York and for whom the inability to get on the flight is not significant at all. If we decide to allocate tickets by lottery or by "first come, first served" (the first wins, the second cries), it is highly likely that we will not allocate the tickets efficiently. Everyone paid the same, but in terms of happiness/well-being, we could have made a different allocation that would have been much more successful. Even with a committee system, we would probably allocate tickets mainly to those who knew how to speak best, and anyway, by the time the committee makes decisions for 1500 people, the plane will have already departed. We need a method that is fast and efficient for allocating tickets. So far, no method has been found that allocates them more efficiently and maximizes happiness more successfully than the free market system. The price of the ticket rises during a shortage until some people say to themselves, "At this price, I'd rather pay for an extra day in the hotel." This method sometimes seems unfair. Why should the rich get on a flight just because they are rich? Why should a company profit more because there is a war?

It is told about a man whose house a fairy visited. She told him she was ready to grant him any wish, but he should know that his neighbor would receive double. The man did not hesitate for a second and asked the fairy to take out one of his eyes.

So yes, it's unpleasant to hear, but there are people for whom life is easier and more pleasant. Being rich, beautiful, and healthy is better than being poor and sick. In any case, this method of price increase until those for whom the high price is not suitable, whether they are poor or rich, is the method that will likely ensure the greatest number of people the satisfaction (maximization) of pleasure because they will be able to Decide Whether to go to great lengths to catch the flight or give it up and save the money. It’s important to remember that in this case, the painful price hike everyone has been talking about applies to tickets from New York. Each passenger had the option to choose a non-direct flight. For example, flying to Athens at the regular price and then taking a direct flight to Israel from Athens. Even if all flights to Israel tripled in price, a threefold increase on a 200$ flight from Greece to Israel is less painful than a threefold increase on a 1000$ flight from New York to Israel. A non-representative example from the web:

This is a wonderful example. A wealthy person who can afford a business class flight to New York. Decides that he Prefer Not to fly now, but at a later date, thus making room for someone for whom the flight is more important. He could also have decided that instead of business class he would fly economy class or that instead of a direct flight he would take a flight with a layover in Athens (or Dubai or elsewhere). And choose Don't do that. If El Al were forced to fly at low prices, it's likely that this person's and others' ability to choose would be denied. The supply of flights would necessarily be lower, and the question of whether they would be on the flight or not, and even perhaps in which class they would sit, would be the result of a lottery/committee or some other decision-making method.

You can also look at it the other way around. Let's assume that lawmakers implemented price controls on flights so that companies couldn't raise them. It's not at all certain that more people would manage to get from the US to Israel. In fact, it's quite certain that fewer people would manage to do so, and the standard of living would decrease:

1. When the price rises, airlines have more incentive to return to flying. A company willing to fly at the previous price has an incentive to divert flights from other routes to the route that has become more profitable, and perhaps even increase flight offerings, for example by leasing aircraft.
2. Alternatively, if the price is capped, the company may stop flying on this route and move its operations to more profitable routes. You'll say, "Then we'll force it to fly." Okay, so by being forced, it will provide the minimum in terms of service and frequency.
3. Changes to routes, flights, and flight cancellations are something I assume all companies would prefer to avoid. A company that chooses to fly to Israel takes on a risk during this period. Every company expects some compensation for that risk. If, in addition to the geopolitical security risk (boycotts), a regulatory risk is added that interferes with determining the "correct" price for a ticket, there will be fewer companies. We already know that the price we previously thought was the "correct" price for a flight turned out to be much higher than the price charged by low-cost carriers. I have previously written about the Minister of Economy who, when the price of Corona masks rose to twenty shekels per mask, declared he would impose price controls and limit the price to a "correct" price of 3 shekels. Fortunately, that minister did not fulfill his promise, and shortly thereafter, the high price encouraged more importers to bring in masks, and the price dropped to about thirty agorot per mask – a tenth of the "correct" price.

Every time someone tries to set a "correct" or "fair" price, or any other name, they create one of three things:

1. Shortage. In this situation, no matter the price, many are unable to buy the product. A black market is often created.
2. A price higher than the market price that would eventually be set: Companies convince the determining official what the correct price is, and the price does not change with market conditions.
3. Inefficiency: When a company's "appropriate" profit is predetermined, it is encouraged towards inefficiency. A company can always earn less, for example, by raising salaries or ignoring hidden unemployment.

We are partners

We saw above that there are two options for dividing the seats, and in any case, two-thirds of those who want to fly will be disappointed. In the lottery method, one-third buy and one-third remain. In the highest price method, the first third fly, and two-thirds remain. But... there's a small difference: part of the additional revenue the company earns is distributed to the remaining two-thirds and to the rest of the country's citizens through higher taxes. Some also argue that in El Al's case, it's unfair because El Al received a bailout during Corona. Of course, the examples above can be changed to any company you want, including Arkia, which did not receive assistance. But as someone from whose pocket a small part of the assistance came, and who still pays taxes, I should actually be happy that El Al is making a lot of money while I forgo a flight, thus returning what it received more quickly.

You are invited to write your opinion below. For quiet and good days. Rimon: 054-5232799 rimon@effm.co.il

I request to dedicate this article to the memory of Major Nail Fiq Fouarssa from the town of Maghar in the Galilee. Nair, a 43-year-old company commander, was killed on the northern border and left behind a wife and child. The 11th casualty from the Druze community in Iron Swords.

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