Tim Harford shows that you can learn a lot about economics by looking at the process of hiring a rental car:
Here’s a puzzle. If it costs €500 to hire a €25,000 car, how much should you expect to pay to hire a €50 child’s car seat to go with it? Arithmetic says €1; experience suggests you will pay 50 times that.
This was just one of a series of economics posers that raised their heads during my summer vacation – indeed, within a few minutes of clearing customs in Milan. One explanation is that the apparently extortionate price reflects some unexpected cost of cleaning, fitting or insuring the seat – possible but implausible. Or perhaps parents with young families are less sensitive to price than other travellers. This, again, is possible but unconvincing. In other contexts, such as package holidays and restaurants, children with families are often given discounts on the assumption that money is tight and bargains keenly sought.
[. . .]
After paying through the nose for the car seat we were alerted to a risk. “If your car is damaged or stolen, you are liable for the first €1,000 of any loss.” Gosh. I hadn’t really given the matter any thought but the danger suddenly felt very real. And for just €20 a day, or something like that, I could make that danger vanish.
[. . .]
What’s happening here? Behavioural economists have long known about “loss aversion”: we’re disproportionately anxious at the prospect of small but salient risks. The car hire clerk carefully created a very clear image of a loss, even though that loss was unlikely. I haven’t paid such fees for years and have saved enough cash to write off a couple of hire cars in future.
