It’s hard to find anything in a store that costs 1 penny. There is one place where people still dream of 1 cent sales: the Internet. NPR’s planet money team reports on the value of the virtual penny.
Why is this important? Economists have a particular type of public good called a utility. Utilities have diminishing marginal costs but high fixed costs. A good example is a large park like the one in my hometown. Even on very busy holidays, there is lots of space to enjoy and it rarely feels crowded. My presence in the park does a trivial amount to diminish the value of the park for other people.
So how should we distribute a good like a park? It still costs money. There are park rangers that need paid and trails that need laid. So we could charge everyone a fee to enter that would be roughly equal to the average cost of operating the park. But with each visitor, the average cost decreases. So the park operator needs both the scale offered by low prices and the up-front money offered by higher fees. Managing this tension is very difficult and this is why you see public operation of parks (and roads and other similar goods), because the true marginal cost is zero.
Today, we are dealing with similar problems posed by a slightly different class of goods. MP3s, operating systems- the marginal cost of production is very low. I can “manufacture” a song on my computer at a trivial cost, simply by copy-pasting it. This is an economic explanation of why people steal software and media all the time. The “true” price is zero. The price you pay is really the average cost of the good. So it would be efficient to scale up production of these things by reducing prices (optimally to very close to zero).
But there isn’t a compelling political reason to fund the distribution of video games or OSX so we still have to pay for some of these things (although in line with economic theory Apple has stopped charging for its OS).
In comes this new technology that reduces transaction costs on the internet. In the past, it cost about 30 cents to transact anything digitally. Now that those costs have fallen its economical to charge lower (and closer to optimal) prices for digital goods. Which is great.
I got a B in public economics.