"The Moorings" is a seaside restaurant in Southwest Harbor, Maine (located on Mount Desert Island). It is not far from Acadia National Park and Bar Harbor. Its population is primarily seasonal complemented by a huge tourist influx during the summer months. As such, there are many restaurants and shops that target tourists. The towns on Mount Desert Island (Bar Harbor, Southwest Harbor, Seal Harbor, Bass Harbor) are not "tourist traps" in the conventional sense and have managed to maintain a distinctive level of charm.

You and your companion have just enjoyed a very good seafood dinner at this restaurant while seated on their outside deck at the water's edge. You linger after dinner to enjoy the gorgeous sunset over Southwest Harbor as you both continue drinking iced tea. Eventually, you request your check and prepare to pay the bill. You are surprised to learn that you've been charged $1.50 for each iced tea you've both consumed resulting in a grand total of $9.00 being added to your final bill instead of the anticipated $3.00! Upon paying your check you inquire about the excessive charge for iced tea and the management confirms that it is their policy to charge for iced tea refills. Since you are not accustomed to such charges you leave disgruntled vowing never to return to "The Moorings" again!

The Economics

Put yourself into the shoes of the manager of "The Moorings." Think about the competitive environment in which you operate your restaurant, the population you serve, the tourism industry, and the basics of microeconomics. Does it make sense to charge your customers $1.50 for each iced tea when they walk out of your restaurant angry never to return? Isn't this bad business practice bound to cost you customers? Wouldn't free iced tea refills be a better policy?

In deciding whether it is better to charge by the glass for iced tea or to provide free refills, you should consider market structure, elasticity of demand, profit maximization, availability of substitutes, perfect vs. imperfect information, game theory, and/or supply and demand. Once you have reached a decision, formulate an economic justification for your chosen policy using one or more of the aforementioned concepts from managerial economics.