You just arrived at your dream summer resort. You had a restful night almost entirely uninterrupted by mosquitoes. You just woke up and had a leisurely and plentiful breakfast. You are making your way to the swimming pool that looked so enticing on the webpage. And what do you find? You find towels. In fact you find towels on every single one of the lounge chairs that the resort has provided. While almost no lounge chair is actually occupied, not a single lounge chair is really available. Economics is supposedly (primarily?) about the allocation of scarce resources. So what about the scarce resource that is a lounge chair next to the pool in a holiday resort?

Let us first approach this problem from the viewpoint of the resort. How did they decide how many lounge chairs they would provide? Probably there is a bit of a space problem. Or let’s say it differently, there is probably a temptation for the resort management to divide the space between hotel rooms and lounge chair space in such a way that there are more rooms so that they can have more paying guests. It probably makes little sense to have more lounge chairs than beds (unless the resort was open to day visitors as well – which we shall not assume here). But should one have fewer lounge chairs than beds? I can imagine the conversation in management about this issue. Somebody will have pointed out that it’s probably ok to have more beds than lounge chairs because not all people who sleep in the resort will also need a lounge chair. Some guests may make day trips to other places. Also even if all guests will want a lounge chair, they probably do not all need one at the same time. The average guest might spend, let’s say four hours every day in a lounge chair (seems a long time to me). And not all guests will want to spend the same four hours in lounge chairs. There may be morning people and afternoon people, before lunch people and after lunch people, early lunch and late lunch people, et cetera.

In fact they are probably right (these are after all just the managers I imagine in my head). It is probably true for many resorts that at any given moment during the day the actual number of lounge chairs needed is smaller than the total number of lounge chairs in the resort. After all we often observe many lounge chairs with only a towel on it. So there is actually no real scarcity and yet we find that there are some people who cannot find a lounge chair when they want one. The problem is that this “game” between the resort guests can have two equilibria and it is easy to get stuck in the “bad” equilibrium.

To see this consider this. What do you do the next day do when you observe that all lounge chairs are reserved through the early placing of towels? Well, you have two options. Either you give up your hope of getting a lounge chair or you get up early and place a towel on a chair yourself.

What do you do if you find that there are always lounge chairs available (in nice locations around the pool)? You don’t even think about getting up early just to place a towel on a chair.

This means that both situations are self-enforcing. If no one places towels in the morning (and there is no real scarcity at any given moment in time) then no one will even consider reserving lounge chairs with towels in the morning. If however people do place towels in the morning and, if you do not you do not find a lounge chair when you need one, you will quite possibly get up early in the morning to do the same. In fact, there may be a race such that you have to get up earlier and earlier to find an empty lounge chair for your towel. An equilibrium is then found in such a way that exactly (in pure theory only) so many people get up early enough to place a towel on a lounge chair as there are lounge chairs. These people are those that care relatively less about sleeping in the morning. This, by the way, is called Harsanyi purification (of mixed Nash equilibria).

So how can you slip from the “good” equilibrium to the “bad” one and what could the resort do to prevent the “bad” equilibrium? I guess that most resorts have a variety of more or less attractive lounge chair locations. So I guess it is possible that some people start putting towels on the most attractive locations, which then starts a gradual chain reaction that eventually all lounge chairs get “toweled” if I am allowed to invent this word (it is not underlined in my editor, so I guess this word exists already). Another possibility is that some large enough group of tourists, perhaps with experience from other resorts and not knowing that in their current resort there is no real need for this, do get up and place towels and cover so many chairs that for the remaining chairs there now is a real scarcity at some point in time.

If the true reason for the lounge chair is that we are indeed simply in a bad equilibrium then the resort can introduce some simple and effective policy measures to restore the good equilibrium. They could, for instance, simply not allow the “toweling” of lounge chairs. They could remove towels after some time. A bit costly, this one, as someone has to monitor the pool area and enforce this rule. But they may not need to do it for too long as, once the good equilibrium has reestablished itself, they can stop enforcing the rule (as it is self-enforcing).

So what about the parking spots and job protection, the other two topics I mentioned in the title? Well, you can figure out for yourself how one could use the towels as an analogy for these two problems.