The New York City Parks Department doubled the annual fee for the hot-dog pushcart that had the exclusive license for the spot just south of the Metropolitan Museum of Art to $288,000. Why would anyone pay almost $300,00 for a pushcart license? Who is obtaining the economic rent for the obviously lucrative pushcart location? How much economic profit is the pushcart owner probably earning?
Why would anyone pay almost $300,00 for a pushcart license?
It is a high-traffic location with a wealty clientiele and, for people in Central Park, there is nowhere else to eat in that area except the expensive Tavern on the Green on the opposite side of the Park.
<<Who is obtaining the economic rent for the obviously lucrative pushcart location?>>
The city obtains the rent
<<How much economic profit is the pushcart owner probably earning?>>
Probably at least $400,000 per year before license fees and $122,000 after fees and other costs.
Drwls
I must disagree with some of your answers. Economic Rent is not the same thing as Accounting Rent. Economic Rent is the value to a business from holding exclusive rights to an asset. In this example, its the value to having exclusive usage of the corner near Central Park for food services. Likely, economic rent is shared by the city and the pushcart owner. The pushcart owner is likely to get some of the rent because he was willing to shell out $300K. How much more we don't know. (Note that if the city issued the licence to the highest bidder at an auction, then the city would have optained nearly all of the economic rent as bidders would keep bidding up the price until the economic rent was exausted.
Second, economic profit is not the same as accounting profit. Economic profit for the pushcart owner is the amount above what he would have obtained if he did not buy the licence but did his next best activity. That is, economic profit = accounting profit minus opportunity cost.
In this example, its hard to tell what economic profit is likely to be. Mainly because we don't know what the economic value of having the exclusive licence.
I hope this helps.
Drwls and Economyst
To understand why someone would pay such a high amount for a pushcart license, let's break it down step by step:
1. Demand for the Location: The spot just south of the Metropolitan Museum of Art is likely in high demand due to heavy foot traffic from tourists, visitors, and locals. It could potentially attract thousands of potential customers daily, making it a highly lucrative location for selling hot dogs.
2. Limited Supply: The New York City Parks Department has created an exclusive license for this particular spot, likely to maintain organization and revenue generation. By limiting the number of pushcart licenses available, they create scarcity and increase the value of the license.
3. Economic Rent: The economic rent is the additional price paid for the use of a resource that has a fixed supply. In this case, the economic rent is the amount above the competitive market price that the pushcart owner is willing to pay to secure the highly sought-after location. The pushcart owner is essentially paying for the opportunity to earn a higher income from the increased customer traffic.
4. Economic Profit: To estimate the pushcart owner's economic profit, we need to consider their total costs and revenues. The costs include the $288,000 annual license fee, cart maintenance, food supplies, wages, and other operating expenses. The revenues come from the sales of the hot dogs.
If the pushcart owner can generate enough revenue from the location to cover all costs, including the high license fee, then they might be earning economic profit. However, without knowing the specific costs and revenues, it is challenging to determine the exact amount.
Remember that economic profit considers both explicit costs (such as rent and wages) and implicit costs (opportunity costs, which include the value of the pushcart owner's time and capital).
In conclusion, the pushcart owner is likely paying a high price for the exclusive license in order to capitalize on the location's high demand and potentially earn economic profit from the increased sales resulting from the prime spot near the Metropolitan Museum of Art.