Abundant Ways to Address Scarcity

How All-inclusive Resorts Illustrate Core Economic Concepts

Esther Dyson: “Having seen a non-market economy, I suddenly understood much better what I liked about a market economy.”¹

Most people who spend time at an all-inclusive resort on the Caribbean coast enjoy the warmth of the sun, the soothing sounds of surf, and the unlimited bounty of the buffet.

I enjoyed those things, but I also enjoyed watching the principles of economics in action.

As most readers will know, at an all-inclusive resort, you pay one price that entitles you to a room, amenities on the property, and unlimited food and drink, including alcohol. The details vary from one resort to another, but the basic idea is that you pay up front and everything else is free or, to be more precise, there is no additional (marginal, as economists say) cost. You paid a price to get access to the lattes at Mike’s Café, but the price of each latte is zero. The result is a fascinating mix of the answer to perhaps the most basic question in economics: how are goods and services to be allocated? This simple question lies at the heart of some of the world’s greatest conflicts.

There always has been, and there always will be, scarcity. Even if the AI and robotics revolutions drive prices down, only one person can live in the house on the cape and only one person can marry the fairest of them all. You just can’t get around scarcity. There is only so much stuff and some stuff is better than other stuff.

One way to address scarcity is to use prices. This is how my partner and I gained access to our five nights at the resort. The resort posts a price. The people willing (and able) to pay that price stay there. Vacationers win because they can choose the resort that fits their preferences and budgets. Resorts win because they choose the price that maximizes their profits. Price is a means familiar to Adam Smith and most humans over the last 3,000 years or so.

According to theory, under the price allocation regime, people on both sides of the transaction are better off. Buyers win because they only buy goods and services at prices lower than their value of the good. Sellers win because they only sell goods and services at prices higher than their cost. So, every transaction makes both parties better off.²

The price system is often viewed as efficient, getting goods to the people who value them the most.³

But once you are at the resort, you are in a different market. Let’s start at the end of the day, with dinner. Our property had a buffet large enough to accommodate pretty much everyone staying on property and five sit-down restaurants, believed by guests to be better than the buffet.

In Philadelphia, like most places in America, if one restaurant is in greater demand—perhaps because it wins a Michelin star—it sets a higher price, and only people who want a nicer dinner will pay it. On the resort, no one is paying any price to eat dinner, so prices don’t determine who eats at the fanciest place. (This is not exactly true, a point to which I’ll return.) So how do tables get allocated at the restaurants?

It varies from one property to the next, but at ours, the answer was basically a lottery. Reservations for the fine dining restaurants all open at 10am for that evening. You can watch people in the large buffet dining room staring at their devices, open to the reservation page for the resort’s web app, as 10am approaches. When the hour arrives, everyone clicks the “reserve now” button and grabs whatever times are still available at the restaurant in a frenzy of clicking and tapping. The lucky ones snagged a reservation at one of the nice places at a reasonable hour. The less lucky ones either got an early/late reservation or, worse, were consigned to the buffet.

Here, where allocation is random, the resort is more or less neutral—it doesn’t make any additional money when people eat at the restaurants⁴—and on the consumer side, the winners are those with the best luck.

Now let’s talk about beach chairs.

Perhaps a couple hundred beach chairs are set around the various pool areas. These are communal resources. They don’t have prices so they are allocated in the time-honored tradition for places to sit near water but not going into it: first-come, first-served. As something of an aside, it’s true that this way of allocating beach chairs is common, not only at all-inclusive resorts. But prices aren’t unheard of. Last year when I was in Greece, the first three rows of beach chairs had one price—I think it was about ten euros for the day—one coffee included!—and chairs in the back had a lower price, about half that. Where there are property rights, there can be prices.

In any case, the first-come first-served works fine for allocating some kinds of goods, such as the tennis courts down the block from me. And it’s better than the randomness of dinner reservations.

Now, in the case of the dinner reservations, there is no relationship between how much one would pay for that reservation and the chance of getting one. With beach chairs, though, there is something like a time price. You might say that a guest’s willingness to get up in the morning to claim a chair reflects their value of that chair. Early-risers are willing to pay the opportunity cost of sleeping in. So, there is some efficiency in the system, more than the randomness of the dinner reservations. The chairs are going to those who value them enough to pay the sleep cost, let’s call it.

Or does it? Resorts like ours have a rule designed to prevent people from claiming a chair for later. The rule is that if you are gone from your poolside beach chair for more than 30 minutes, the staff will remove your belongings to the lost and found.

Thoroughly predictably, this rule was never enforced, probably because the staff have no particular incentive to do so. Not only do they not benefit from enforcing the rule, they could alienate people who might otherwise tip them.

After spending one day at the resort, the lack of enforcement becomes perfectly obvious, as dozens of towels adorn far more chairs than there are swimmers in the pool. The permissiveness of the staff becomes common knowledge.

So what should we predict? Well, there is a clear, obvious, and implicit norm that leaving a towel and even a small trace of your stuff on a chair is a claim to a property right over it. So early in the morning, guests drop towels and a book or what have you on nearly every beach chair by the pool, starting with the ones with some shade.

From this we see the winners are not just early risers, who don’t mind the opportunity cost of getting up early, but rule breakers, who don’t mind flouting the rules. (Needless to say, we were not among these miscreants.) Symmetrically, the losers under this regime are rule-followers, who get the shaft and have to stand around awkwardly as they wait for people to call it a day and leave the pool area.

Meanwhile, the resort neither wins nor loses under the regime. The resort and the staff have no stake in which guests are on which chairs.

Now let’s turn to an area in which the interests of the guests and the resort conflict: the swim-up bar.

It’s hard to beat drinking at a swim-up bar, the novelty of having a pina colada while in waist-deep water. It’s peak vacation time.

Unsurprisingly, while there are many bars around the property, the swim-up bar is among the most popular. If people were paying per drink, management would have a strong incentive to ensure that the swim-up bar was well staffed, as each drink represents more profit. But people are drinking at zero marginal cost. So management has no incentive to keep wait times down at the bar. In fact, they have an incentive to delay the process as much as is tolerable, since every drink is a cost. The bartenders, likewise, receiving no tips—people tend not to tip on free drinks at the resorts, especially at the swim-up bar, since no one has their phone or wallet on them—have no particular incentive to be speedy. Drinks are allocated again on a first-come, first-served basis.

The thoroughly predictable result of all of this is long waits at the swim-up bar. Drinks are allocated not by how much different people might be willing to pay, but by who is able to capture the attention of a bartender. Often this is by waiting at the bar, but there are other means, which I leave to the reader’s imagination.

The resort wins this battle because it serves fewer drinks and reduces its costs. Impatient people who get out of the pool and just go to the damn lobby bar lose this skirmish.

What about service elsewhere?

At regular resorts—a la carte rather than all-inclusive—servers often continuously filter through the pool and beach area taking orders. Their earnings depend on how much food and drink they sell because—in the U.S., at least—they are tipped. They are often right at the edge between attentive and pestering, depending on the property.

At our all-inclusive, staff were always polite, but… scarce. This is not to cast aspersions on the people themselves. It is to say there were few people tending to a lot of guests and they were somewhat aloof.

Some services, however, are not included in the all-inclusive resort price.

For example, you can pay to have a massage in the one palapa on the beach. The price was about the same as one night at the property. Further, the people selling this service were on commission, earning more money with each sale. By the time we left the resort, the woman who sold us our massages was easily, far and away, the person to whom we had spoken the most. I half expected her to invite us home for dinner. She asked us when our last day was on three separate occasions. No one else on the staff seemed to care.⁵

Unsurprisingly, far from being aloof, these staff members were quick to pull aside passing guests and circulate among the people reading their books by the pool. I wouldn’t go so far as to say intrusive. Let’s say diligent.

A snorkel excursion to the reef was also not included in the price. I will leave it to the reader to guess how the people selling those services acted.

The thoroughly predictable result of various incentive schemes appeared everywhere.

Those sit-down restaurants? It will probably not surprise you to learn that the diner’s choices were circumscribed. No, you cannot order a soup and a salad. You may choose one item from each of the three categories: starter, entrée, and dessert.

You may have wine with dinner, yes. But we will not offer it to you; you have to (awkwardly) ask. But here is a list of expensive bottles of wine you can purchase. Take your time, let me know if you have any questions!

That steak you ordered? Yes, it’s good enough that you won’t leave a bad review for the resort as a whole but also small enough that you aren’t literally eating into their profits. After all, the restaurant isn’t going to live or die because of google reviews.

There were also some peculiarities I didn’t completely understand.

As we walked by the sit-down restaurants in the evening, they seemed to be operating well below capacity even though we were unable to get a reservation. I suppose this means that serving guests at those restaurants is more expensive. It seems like a bad look, though, and it’s hard to imagine their marginal costs were all that large, but who knows?

One way to think about this, if one wants to get a bit technical, is that the restaurants are basically living in a command economy, as one finds in communist systems. Management (the government) sets the price, in this case zero. Consumers respond by demanding the good at that price, leading to queues and rationing. In this case, you can’t really queue, so you get rationing-by-app. The restaurant doesn’t respond to the surplus demand by raising prices or increasing supply because neither is under its control.

On that note, of queuing, people were held for some time outside the buffet even when there was clearly plenty of seating available in the restaurant. It’s not clear what the resort’s incentives are in this case. If you have a thought, feel free to comment. It didn’t seem to me that anyone was better or worse off, except the guests who had to wait a bit more.

From all of this, we can take several lessons.

First, there is no perfect solution to the inevitable problem of allocating scarce resources. Consider some of the ways humans allocate valuable resources:

1. Prices. This way leads to efficiency. Many people like this one, but especially those with a lot of money, the thing used to get stuff.⁶

2. First-come first-served. This way gives you some efficiency. Just think about the people who queue for iPhones and Duke basketball tickets. They wouldn’t be there if they didn’t want those goods more than others.

3. Need. Emergency rooms generally work this way.

4. Merit. Many people think this is a good way to allocate things like jobs and awards.

5. Force. Whoever can take it gets it. Favored by people like Genghis Khan and Alexander the Great. Less popular with those without weapons, defenses, or power.

6. Mutual preferences. See: Tinder.

7. Identity. Some stuff is allocated, or allocated preferentially, based on identity characteristics such as sex, ethnicity, religion, and so on. Nepotism falls in this category, and was favored by people like Henry VIII and Joffrey Baratheon. Not really efficient, but this kind of system helps to solve a coordination problem.

8. Lotteries. Beach chairs, yes, but also places in certain schools.

There are other ways as well. All have their advantages and all have their drawbacks.

Maybe these systems are better for some goods and services. Maybe lotteries are a good way to allocate some things in life, though I struggle to come up with good examples. Certainly merit seems like a good way to allocate prizes and positions of responsibility. The point is, getting rid of prices solves some problems but invites others in. There is just no way around scarcity.

Second, all-inclusive resorts are little laboratories where you can look at different ways to allocate goods and services. In particular, these resorts illustrate to people who are accustomed to prices what happens when you don’t use prices to allocate stuff.

On the one hand, people like it. People don’t like prices—who wants to pay for stuff? But once prices are gone, something has to determine how things are allocated. We see what it does to dinner reservations, but let’s expand out. Let’s say that health care is a right and that as a society we don’t want to make people have to pay for being healthy. Ok, but then how can we figure out how much health care to make and who gets it? Could healthcare come to resemble the swim-up bar, with long wait times and a mediocre product? Without prices, we invite a zoo of allocation systems to take their place, as indicated above.

Related, as economists have noted, figuring out how much stuff people want is hard. Those empty seats at the restaurants? Could that be because the resort literally doesn’t know what people want? This is essentially a shortage economy: there’s excess demand and at the exact same time excess capacity because prices aren’t adjusting to coordinate them. The antidote to this problem is, of course, prices, which carry information. Without a price signal, as economists say, the market can’t clear. That is, following people such as Adam Smith and Friedrich Hayek, sellers raise prices when there is excess demand and lower prices when there is excess supply, pushing the price to the point at which supply equals demand. In theory. Prices then become signals of the value of the good or service.

Third, individuals and groups respond to incentives in thoroughly predictable ways. The firm limits drink consumption. Staff work hard when they are compensated on the margin. Guests break rules to gain positional goods.

For my part, I like economic efficiency—the distribution of goods and services to those who most value those goods and services—so I, like Esther Dyson, very much like the price system and very much don’t like when prices are distorted or absent. There are exceptions, such as the emergency room and jobs, but for most things people want to access, prices are the right way to pair demand with supply.

1. To be fair, I didn’t come across this quote by reading the Reason piece. The quote appears in Civilization VI.

2. I’ve smuggled in a bunch of assumptions, including enforceable property rights and perfectly competitive markets in equilibrium.

3. Again, many assumptions underlie this claim. There could be information asymmetries, externalities, etc. I’m going for big picture here, not an economics textbook.

4. I should have caveats throughout. There are special offers—two lobsters!—at some restaurants which do cost extra. More generally, for an additional cost (per person per night), you get access to a number of benefits, such as a special reserved lounge and beach area, as well as the chance to make dinner reservations a month in advance, ignoring the same-day 10am rule. So many if not most of the restaurant slots, even in the communal all-inclusive setting, are actually allocated with a price system.

5. That’s unfair. On our last night, which was also close to our anniversary, Eduardo snuck us into a great reservation time at the resort’s best restaurant. Many thanks, Eduardo!

6. Yes, it me.