Governments Don't Price Well

If the government priced the same way that firms do, more civilians would have traveled to space on their own dime. But, they don't ... and its probably because a bureaucrats job isn't on the line when making that sort of pricing decision.

I bring this up because it looks like the Ansari X prize is going to be won soon. This is a privately donated prize of $10 million that will be awarded to the first private group to put a 3-person vehicle in space, bring the vehicle back, and do it again within 2 weeks. The lead group made the first successful leg on Monday, and isn't expected to have a problem repeating the performance. You can even catch up on the news at a blog entitled Ansari X Prize Space Race News.

The odd thing is that the prospective winner has spent well in excess of the value of the prize. Why would someone spend (the rumoured) $20 million to win $10 million? The obvious answer is that this is like buying an option on the stock market - there will probably be a lot of business in the future to make up the difference.

Yet, governments have been able to take people to space for a long time. Why don't they take more? Hmm. NASA has never allowed "passengers". This is tantamount to saying that the price to buy a ticket as a passenger is infinite. No surprise that there were no takers. The Russians are more reasonable, and have taken a passenger for about $20 million.

What is so odd about this is that if, say, NASA were private, they would never have charged so much. The reason is that businesses charge close to their marginal cost for most goods. If they have some market power, they may be able to charge more for a while, but this just encourages others to undercut the price.

And what is the marginal cost of taking a passenger on a spaceflight? It's effectively zero. Not literally zero, but really close in the big scheme of things. Once you've built the rocket, and the launch pad, and the control facilities and so on, the cost of taking one additional person is miniscule. Maybe not zero, but did it really cost NASA an arm and a leg to haul Jake Garn into space for a joy ride?

My guess is that taking one additional person, as an almost untrained passenger, on a rocket mission to space would cost under $500,000. At that price, people would be lining up to do it.

Why didn't governments price space travel this way (aside from the fact that they may just not have wanted to be in that business)? The primary reason is that government agencies are very bad at pricing things optimally. Businesses price at marginal cost because their future is on the line. Maximizing profits is the best way to ensure their future in that enterprise. But, most governments price to cover average total cost - the average amount needed to avoid losing money. The problem with this is that it means that a government bureaucrat somewhere decided that a passenger on a rocket should have to pay for a chunk of, say, Cape Canaveral. This makes the opportunity prohibitively expensive.

If you want to go to space but haven't had the chance, blame a bean counter.