David R. Henderson has a nice post hitting on the sunk cost fallacy in typical discussions over drug pricing. You can see in the comments though that I think this is a trickier topic than perhaps David realizes. (Or, alternatively, David doesn’t realize how much clearer his thinking is on this than the average person’s.)
Let me elaborate on a puzzle I alluded to in the comments. I’m curious to see what you guys think. (BTW, I don’t mean to exclude both of the women who follow this blog; “you guys” is a generic term.)
There’s a general principle from intro to microeconomics that says in a competitive industry, in equilibrium P=MC. So how would we actually apply that in practice to the fast food industry? At the point at which the burgers are already made and sitting on the back warmer, what’s the marginal cost to the firm of the worker picking up the burger and handing it to a customer? 5 cents?
So, in an efficient fast food industry, burgers should be priced at 5 cents. Don’t you dare say that the firm needs to charge at least enough to cover average costs, because (as David points out) that involves a sunk cost fallacy…
Something is obviously not right in the above. But I’m curious to see how you guys would unpack it. If you want to say, “I don’t trust them there textbooks with their funny graphs!” OK fine, but ideally I’d like you to solve it within the world of standard textbook micro, since presumably that can be done.