Deathonomics

The trip to the Carousel Boutique was made lively by the sight of a pony leaping out of the glass window on the second story. No, Twilight thought as she caught the pony in the inconsistently colored glow of her magical levitation, the pony had been flailing through the air as if she had been pushed by something…or somepony.

“And never come back, do you hear me?” Rarity screamed from the window. “Never!”

“Hi, Rarity,” Twilight said, depositing the traumatized pony on the ground.

“Twilight! What a surprise! Do come in!”

“I apologize for that little…tête–à–tête, so to speak, earlier,” Rarity said. She gestured to an ornate sofa with an unusual layout. “Have a seat on the tête–à–tête. To what do I owe this visit?”

Twilight chose a simple chair. The sitting room of the Carousel Boutique was classic Rarity: classy and rare, with layers of purple curtains to produce the desired lighting. Rarity flopped down on the tête–à–tête, looking slightly defensive.

“Well, you can’t blame me, Twilight. After all, now I have to pay for the broken window!”

“Actually, there’s an interesting economic parable about a broken window—“ Twilight began.

“But you would simply not believe that pony! Il a la tête dans le cul,” she muttered.

Twilight looked at the couch.

“What?”

“Anyway, what have you come to talk about?” Rarity asked. “I am always delighted to entertain the chief executive economist of our very own bank, not to mention my friend, but you do strike me as the direct type.”

Rarity leaned her head on her hoof and smiled. She looked…relaxed, in a way that surprised Twilight. Something about the end of the world and all life on it being pushed back to its previously scheduled date of three or so billion years from now brought out a healthy glow to her features Twilight hadn’t noticed before.

“I need to know if you use marginal cost pricing,” Twilight blurted.

Rarity clapped her hoofs. “Tea! Cake! How could I be so  rude? Do excuse me!” —and Rarity vanished to another room only to reappear a minute later bearing a tray. She set it down on the table and levitated the silver tea pot in a blue glow.

“Tea?” she asked.

Twilight stared nervously at the incredibly fragile and expensive-looking teacups. “I’m more of a coffee drinker.”

“It’s heavily caffeinated,” Rarity assured her. “How else would I get my work done?” She chuckled. “I’m not Applejack; I don’t force my sister to do labor! Sweetie Belle voluntarily helps me spin, weave, loop, cart, carry, and box with those tiny, tireless hoofs of hers. Oh, how much fun she has playing on the dressmaking machines in the basement—“

“Caffeine?”

“Yes.”

“Okay.”

Rarity poured the tea and pushed a cake in Twilight’s direction. “What’s on your mind?”

“Marginal cost pricing,” Twilight said. “Do you do it?”

Rarity stared at her.

“What on earth is marginal cost pricing?”

Twilight jolted; it was either the shock or the caffeine kicking in.

“M-M-Marginal c-cost pricing! When-you-set-the-price-of-a-good-equal-to-the-marginal-cost-of-producing-it!”

Rarity raised her eyebrows; Twilight’s teacup was clattering against the plate held in her trembling hoof.

“Twilight, dear, I’ve never heard of any such thing. Perhaps you shouldn’t drink any more of that tea. It’s quite strong.”

“I-I was t-talking to Pinkie Pie—“

Rarity nodded sagely. “Ah, that’s what happened.”

“—And she priced things randomly, and Applejack wasn’t any better, never changing her prices ever, and I don’t know what to doooooo!”

By now Rarity looked quite alarmed. She set her teacup down carefully and faced Twilight.

“Twilight, I’m sure to an economist this esoteric question of pricing must seem quite important, but to us businessponies prices are simply a means to an end. Look at Fluttershy, who always sells below market value because she wants to make sure everypony who needs her products to care for an animal can afford them—”

Twilight gasped hoarsely; it sounded a lot like a death rattle.

“—Or take me. I am a designer, but you would not believe how many ponies utterly fail to appreciate what I do. Not only do they want to give me their…input,” Rarity held the word in her mouth like it was something wet and smelly that had crawled under her bed and died, “But also they want to bargain.”

“What—“

“All prices are stated upfront! The price never changes, guaranteed! Your money back with return of dress in original condition on date production began!”

Glimpsing the depths of another pony’s madness helped sooth Twilight’s. She took a deep breath, reminding herself of the time she had had the temerity to think Princess Celestia was exaggerating the ubiquity of rational behavior (Twilight had only been just a filly, still unwise and foolhardy). But her princess had smiled, looking directly at Twilight as if she knew what she was thinking, and began to discuss the budget constraint....

“Rarity, you should see discussing prices with the customer as a useful way to gleam information about the demand for your products—“ Twilight began.

“Demand?” Rarity shrieked. “How dare they demand anything from me? They should worship my dresses!”

By now she was standing, breathing heavily. At some point the tray had been upset.

“Why can’t I ever talk to one of you without insulting your deeply held values?” Twilight sighed.

“Probably because you can’t stop thinking about how much we’d be willing to pay to keep them.” Rarity gasped, a hoof flying to her mouth. “That was cruel of me! I’m so sorry.”

Twilight shrugged. “Pay me five bits and I’ll be indifferent.

They looked at the spilled tea soaking into the floor.

“Sorry about your carpet,” Twilight said.

Rarity waved a hoof. “I’ll fo—ask Sweetie Belle to make another.”

They settled down again, Rarity beaming like the perfect host despite the scent of caffeine, which Twilight’s nose could detect in a way that would impress a shark, rising from the floor.

“Twilight, I threw a pony out of the window of the second story earlier,” Rarity said. “Did you notice?”

“I did.”

“I hope it didn’t disturb you.”

“Applejack lets fillies pay to climb into a Cerberus’s mouth so they can take pictures, and Pinkie Pie is some kind of cult leader," Twilight said. “You could say that my sense of…impropriety is undergoing a dramatic recalibration. But since you mention it, I am curious as to why you threw a pony out of the window of the second story earlier.”

“She—well, the dress was late—some adjustments had to be made—she didn’t realize light green and chartreuse are different colors—and she wanted a discount. I’m perfectly sane.”

Rarity beamed.

“Rarity,” Twilight said carefully, “As an economist, I fully respect how you take pride in your work. And I have always felt that scientists and artists are closely related species of the same genus. Truth is Beauty, or Beauty is Truth, or something like that.”

“More a function of color and shape than truth,” Rarity mused.

“But there is such a thing as a price too high,” Twilight said.

She waited for the thunderclap, but it never came. Rarity looked confused.

“A price…too high?” she said, testing out the words like they were tea without caffeine: comprehensible in principle, yet coming from a frame of mind she could never hope to fathom.

“A price too high,” Twilight repeated. “Prices, you see, are a measure”—at this point Twilight launched into an overlong and familiar lecture on the role of prices in allocating scarce resources—

“And that’s how chocolate is made,” Twilight concluded. “Now it’s worth considering just what happens when the price is, well, wrong.”

Rarity already looked bored. “It is?”

Twilight’s brain promptly auto-lobotomized its ability to read Rarity’s facial expression.

“Yes,” she said. “It is. Rarity, do you ever have trouble moving your dresses? Finding clients and so on?”

“True patrons of the art are as rare as true friends,” Rarity admitted. “Except to Pinkie Pie, who is something of a friend-slut.”

“But what if you paid them to buy your dresses?”

Rarity’s eyes turned glassy. Twilight could only guess that she was evacuating some inconvenient thoughts from her own mind.

“Sorry, Twilight, I must have misheard you. What were we talking about? Fashion?”

“I was saying, what would happen if you paid ponies to buy your dressing? A negative price. They’d be lining up to buy them. You’d sell out of everything within the week, and never mind the size or cut!”

“Twilight, I regret to inform you that you are utterly mad.”

“The point is,” Twilight said loudly, “Prices regulate quantities. They determine how much of what gets sent where. When prices are higher, ponies buy fewer things. Higher priced dresses mean fewer dresses get sent to ponies. When prices are lower, ponies buy more things. Lower priced dresses means more dresses get sent to ponies. The inverse relationship between prices and how much of what gets sent where is called the Law of Demand,” she added, “Since a pony’s demand is how much they’re willing and able to pay for a quantity of some good.”

“That’s fascinating, Twilight—“

“Really?”

“No.” Rarity folded one hoof over the other.  “Are you saying I should…lower my prices?”

“Sometimes, maybe,” Twilight said quickly. “It’s worth considering. Rarity, I know how much you want ponies to appreciate your dresses, but no pony can appreciate them when they can’t afford them.”

“They buy food, don’t they? They have bits to spare!”

“You’d benefit as well. Every dress you don’t sell because your price is too—is higher than some ponies in their philistine ignorance might not want to pay—is a cost you incur with no compensation. If you were willing to lower your prices to match the demand for your product, then you could make more money by selling dresses that no pony wants to buy at their current price. That’s your supply—how much of something you’re willing to produce at every price—and at the price that sets the quantity supplied and demanded equal to each other then the amount produced will equal the amount bought—there’ll be no dresses that go unsold and no ponies who want for dresses—an equilibrium—“

“Equilibrium? I thought that was just the name of our rainbow attack when we combine powers. I didn’t think anypony actually cared.“

“I care,” Twilight said. She was sweating. It was a good kind of sweating, the after-dark kind of sweating that happens under the bedsheets. “I care a lot.”

“I can smell that. But Twilight, my, ah, ‘supply,’ as you say, doesn’t work like that. I simply can’t bear to part with my dresses for anything less than their true value.”

“Oh, well, now I understand the problem. Rarity, value is subjective. Some ponies care about dresses a lot—on the margin, which is what matters. Others less so—on the margin again. There’s no question of external, objective truth here, just the individual pony’s preferences.”

“I don’t think you really appreciate my dresses,” Rarity said acidly.

“Probably not. Isn’t that my point?”

Rarity surprised Twilight with silence; she looked away, thinking.

“You’re saying that I could make money by being more…accommodating? That is a persuasive line of reasoning, to be sure.”

Twilight beamed. “Everything has a price.”

Rarity still looked pensive. After a few minutes, Twilight excused herself and left. She had one last pony to speak with.

At some point Rarity realized her legs were cramping. She half-fell off the couch and stumbled toward the stairs. It was dark. Was Sweetie Belle still in the basement?

Rarity yawned. She had meant to spend an hour or two revisiting some of the no-sales, beautiful dresses she made that couldn’t find a buyer…but perhaps that could wait. Still, there was one thing she had to take care of. Never leave a customer waiting.

Rarity trotted up to the fitting rooms and gasped at the sight of her black dress hanging beautifully on the thin pony’s frame.

“Oh, darling, that is you!” she exclaimed. “This look will knock them dead!”

It was dark, and Twilight was tired. Her legs complained as she headed toward Fluttershy’s animal sanctuary. She ignored them. They were not as good at economics as she was.

Twilight had never seen Fluttershy’s sanctuary at night before. Owls rotated their heads and blinked at her. She heard frogs croaking in the grass, and some kind of…lemur? hung from the fence by its tailed and chattered in her direction. Behind the fence was a deep shadow, and when Twilight peered closely at it, she realized it was a…

…Giant snake.

Twilight took deep breaths, stilling her rapidly beating heart. Fluttershy had a flying serpent that was gaining a hundred pounds a week. She knew that, they all knew that. It was just a giant flying snake. Nothing to be scared of.

Twilight knocked on the door, or tried to without making any actual noise, not wanting to wake the sleeping animals. She was surprised when the door opened at the softest of taps.

“Oh, hello, Twilight,” Fluttershy said. Her eyes were red-rimmed, and she sounded stuffy and hoarse, like she had been crying. “Won’t you come in? If you want, I mean.”

Twilight nodded and followed Fluttershy inside. Fluttershy took her through the store on their way to the back. It was…empty. Nothing sat on the shelves, even places that were clearly marked for pet food or fish bowls. And judging by the dust that floated everywhere in the dim light, the store had been empty for a while.

“Fluttershy, what happened?” Twilight asked.

Fluttershy sniffled as they sat down at a table in the back. She reached for a box of tissues.

“I-I sold a puppy today to a filly and her family,” Fluttershy said. Then she began to wail. It was weird to listen to; it looked loud, yet coming out of Fluttershy it sounded like a strained, extended squeak.

“Oh,” Twilight said. She had meant the store. “Um…congratulations?”

“T-Thank you,” Fluttershy choked out. She blew her nose into a tissue wetly.

“Do you always cry when you sell a pet?”

“Y-Yes,” Fluttershy hiccuped.

“But is it a good thing or a bad thing?”

“Good. She has a family to l-love her!”

“So you’re crying because…?”

“It was my puppy!” Fluttershy wailed again, and she began to sob.

“If it makes you cry then maybe you shouldn’t be in the pet trade,” Twilight said. She waited to see if this logical piece of advice would soothe Fluttershy’s anguish, but she went right on crying quietly, her head in her hoofs.

Twilight still wanted to know about the store. “Fluttershy, why is this place so empty? The shelves are bare.”

Fluttershy wiped her eyes on her leg. “H-Huh? Oh, it’s always like that. I don’t even bother shelving new inventory because they sell out so quickly.”

“Why’s that?”

Fluttershy shrugged despondently. Tears welled in her eyes again.

Twilight was a scientist, trained to see patterns. A sneaking suspicion began to form.

“Fluttershy, what kind of prices do you charge relative to other stores that sell pets and pet-related products?”

“They’re really, really low,” Fluttershy said. “I want to make sure everypony can buy the things their pet needs!”

“Oh, well, that’s just silly,” Twilight said as Fluttershy began to cry again. “You should charge a higher price so that the products go to the ponies who really need them, not just anypony.”

“Cheer up,” Twilight added after a pause. “Your pricing strategy is irrational, which means it can be fixed.”

Strangely, the bearer of the element of Rationality only cried harder at this news.

“There there,” Twilight said. She patted Fluttershy awkwardly on the leg. “There there. Everypony makes mistakes.”

Fluttershy blew her nose again. Sniffling, she looked at Twilight.

“What are you talking about?”

“Let me explain the basics of the price system.”

She did.

“Got that?” Twilight said.

“No,” said Fluttershy, indignant. “Usually when I’m sad Rainbow Dash would tell me a story from the stock exchange, or Pinkie Pie would sing a silly song."

“And I’m here to teach you economics!” Twilight beamed. “Isn’t this fun?”

Fluttershy glared at her. Twilight continued.

“Prices don’t simply determine where resources go,” Twilight said. “They also determine to whom resources go.”

“Obviously,” Fluttershy muttered.

“When prices are lower, ponies buy more,” Twilight said. “But producers supply fewer goods at a lower price because they stand to make less money per unit sold. So a too-low price leads to a shortage of goods, as more ponies have the money and inclination to buy a good than producers are willing to supply. The result is empty shelves in the store. Shopping suddenly feels like a race as suppliers quickly sell out. Ironically, it’s harder to get your hoofs on something when the price is too low!”

“I’m sad,” Fluttershy said.

“So only some ponies can get what they want during a shortage. But who gets their hoofs on these under-supplied, over-demanded products?”

“And probably experiencing separation anxiety.”

“As the price rises, fewer ponies will want to buy the same amount of the good. The ponies who will be still willing to buy the good at the equilibrium price level where the quantity supplied is equal to the quantity demanded are the ponies who most value the resource, the ponies who want it the most. These are the ponies who really need your help! But when you lower the price, you encourage more ponies to compete for fewer goods. Now these ponies who really could use a bag of feed or a toy for their pet are battling with ponies who simply are picking something up because it’s so cheap and might come in hoofy eventually. The resources no longer go to who is willing to pay the most but who happens to be nearby or gets their first. Economists would say that the resources are being allocated by time rather than money, and time is much less likely to correlate with value.”

Twilight held her breath, waiting for the element of Rationality's response.

“So you’re saying,” Fluttershy said slowly, “That by raising the price, I protect the ponies who need the products most from the competition of ponies who can afford to do without?”

“I don’t like to talk about ‘need,’” Twilight grimaced, “But yes.”

Fluttershy’s tears had stopped. She looked deathly serious.

“I—have to think about this. I’m not sure I’ll know how to charge the right price after doing it wrong for so long.”

“I can give—lend a book to you about price theory. All you have to do is”—Twilight hesitated—“Use marginal cost pricing.”

Fluttershy sighed.

“What’s that?”

“Marginal cost pricing is when you set the price of the good equal to the marginal cost of producing it. But it’s really a principle of rational behavior in general: do something until the marginal benefit of doing it equals the marginal cost of doing it.

“By marginal I mean the point at which choice occurs. The marginal unit is the ‘just one more.’ If you produce 500 units of something and are debating producing a 501st, that’s the marginal unit.”

“Should I?”

“Should you what?”

“Produce a 501st unit.”

“That depends on whether the price you can sell it at is greater than, equal to, or less than the marginal cost of producing it.”

“The marginal cost is just the cost of producing the marginal unit?”

“Exactly. So the decision to produce another unit is simply the question of whether you profit from doing so. If the marginal cost is ten bits, then if you can charge higher than ten bits, go ahead and produce it. If you can only sell the marginal unit at less than ten bits, then don’t produce it. If you can sell it at exactly ten bits, it’s a wash. You’re indifferent to producing the marginal unit. You can make the decision for every unit this way and work your way up to 500 of them.

“And this is true of every single decision you ever make. Do something if it makes you better off. Don’t do it if it makes you worse off. If it doesn’t affect you, who cares?”

“Brilliant.”

“I know! But there’s a catch: marginal benefit falls. The more you do or have of something, the less it makes you better off. In the case of a business producing something, at first their goods will be bought buy ponies who desperately need them and are willing to pay a lot. But as they produce more and more, the marginal consumer becomes ponies who are less interested and willing to pay less. But again this is generally true. When you want something sweet, the first bite of cake is heavenly. By the tenth bite, you’re just eating it because it’s there. By the hundredth bite, you’re about to burst and sobbing helplessly as Pinkie Pie forces another mouthful down your throat—sorry. I had a weird experience at a Sugarcube Corner today.”

“There’s no other kind at the Sugarcube Corner.”

“So you can see that an activity, whether it’s working a factory or eating cake, becomes less beneficial as you do more of it. That means a behavior that is beneficial at first will grow less so over time and eventually become harmful. So you want to do something until the marginal benefit equals the marginal cost because—“

“I get it,” Fluttershy said. “Sometimes the marginal benefit of doing something is less than the marginal cost, so you just shouldn’t do it. Sometimes the marginal benefit is higher, and you should do it. But as you keep doing it, the marginal benefit falls. If it falls below the marginal cost, you’ve overdone things. But if it’s still above the marginal cost, you can still squeeze some good out of doing more of whatever. You only want to stop when the marginal benefit is equal to the marginal cost.”

Wow, Twilight thought, impressed. Maybe Fluttershy has the makings of a great econopony.

“Exactly,” Twilight said. “And that’s why marginal cost pricing is what rational businessponies should do. If the price is above the marginal cost, then you can benefit by producing more until the marginal cost rises to meet the cost. If the price is lower than the marginal cost, produce less until the marginal cost falls below the price. As you said, you only want to stop when the price is equal to the marginal cost.”

Fluttershy sniffled wetly.

“That really didn’t help me feel better.”

“Me neither,” Twilight said. She stared despairingly at the table.

“Twilight?” Fluttershy said. “Are you all right?”

“No.”

“Why not?”

“Nopony uses marginal cost pricing.”

“Oh.” There was a pause. “Um…so?”

Twilight didn’t answer. She continued to stare at the blank table.

“Would you like to hold something fluffy and soft and warm while it sleeps?” Fluttershy asked. “That’s what I do.”

“No.” Twilight stood jerkily. “I need to go. Thanks for letting me talk.”

Fluttershy watched her go. After a while she blew her nose again, got up, and went outside. She flew over the fence as silently as a shadow is invisible in the darkness. All her naturally evolved organisms were here, most sleeping. The owls hooted congenially at her, and the woolly lemur climbed around toward Fluttershy, hoping food might appear from her hoofs. The margay in the corner was only pretending to sleep as it eyed the frogs hopping through the grass.

They were her responsibility, and she would do whatever it took to protect them. Twilight thought there was a way of thinking about how to do things…how to make everything happen in the right amount, in the right way, to the right ponies at the right time. Maybe she was right.

If it meant she could save everyone, it was worth considering.

A hoofstep within the fence that she didn’t recognize. Fluttershy tensed. But none of the naturally evolved organisms awoke or made a sound. Fluttershy took a deep breath and turned.

“Oh, it’s you again. I don’t know how you heard that one of our bats just died recently, but I’m not—“

A pile of bits fell at her hoofs. Fluttershy stared at it. Then she turned to get her shovel.

“Wake up, Spike!” Twilight shouted as she climbed the stairs of the treehouse, slamming the steps with her hoofs. “Wake up!”

Spike appeared at the door, looking groggy but alarmed.

“Twilight, what’s going on?”

“A letter. We’re sending this out to all the Daughters.”

“And the One Bank?”

“Of course!”

Twilight sat down to compose her letter.

To the most esteemed econoponies of Equestria,

Today I spoke with the preeminent businessponies of Ponyville about their pricing strategies. I do not know how to say this any other way, so I will say it plainly. They do not use marginal cost pricing.

Send surveys to all the businesses of your domains. Ask them if they use marginal cost pricing, if they even know what marginal cost pricing is. I am doing so, but I can already predict the answers.

We must explain this, and we must explain this now. Do firms not use marginal cost pricing? Are firms not profit-maximizing? Are ponies irrational? A fundamental tenet of price theory is under attack, and we, the leaders of the econoponies and by extension the world, must respond. I fear something terrible is coming Ponyville’s way, or was already here, waiting for me.

I am

—Twilight fought with her arm, which was suddenly rubbery and weak. She couldn’t make it write—

Confused. I need

—Again—

Help.

Your sister, student, and the servant of Equestria,

Twilight Sparkle

Twilight wrote the same letter out eight more times and handed them to Spike.

“Send it.”

He read it quickly.

“Are you sure?”

“Send it!”

Spike rolled the letters up and swallowed them one by one. They vanished in a burst of green smoke. Soon they would reach the other banks. Part of Twilight, most of her, feared the response would be swift, brutal, and utterly humiliating. But another part of her feared it wouldn’t be.

“Twilight?” Spike reached out to her, hesitated.

“Go to sleep, Spike. And pray that in the morning I have been revealed to be the world’s biggest fool.”

Twilight damped the candle. In the darkness, it was hard to sleep.

Miles away a pony streaked through the air on the back of a winged skeletal monster. She wore a stunning black dress that would have clung in all the right places on any other pony. On her it billowed loosely, as if it lacked anything substantive to hold onto. She touched down at the Everfree Forest, now unguarded, and the giant bat waited by the entrance while its master went inside.

The terrible, murderous vines and thorns rose to hinder her as she stepped into the forest, but she scattered rotten apples and stale cake around her. The vines grabbed the offering and let her be as she walked through the maze, never stopping to check her direction. Instead she seemed sure that wherever she was going was the right direction, that the world itself would turn to ensure it, and maybe she was right.

She stopped in a clearing lit by a weak pale blue glow. There was a tall statue of a pegasus holding a spear in one hoof and a book in the other. Below the statue, an inscription. The pony read it. Then she went up into the air by the statue’s head. She was not floating in midair. She had simply decided to occupy that space.

A scythe gleamed brilliant in the near-darkness. It hovered by the neck of the stone pegasus—and cut.

The head of the statue fell to the ground, and that’s when the Everfree Forest began to rise.