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December 31, 2007

Are the best things in life free?

The holiday period is a time to contemplate what's important in life. An old saying states, "The best things in life are free." As an economist who deals with costs and prices, do you agree? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I certainly agree that concepts like love, compassion, honesty, etcetera are probably very much the most important traits in life. And certainly it's hard to put a dollar value or price on these, so to that level, I would agree with the statement. But on the other hand, when you get into economics and you talk about typical goods and services, I think most of us would think, gee, wouldn't it be great if we had free gasoline or free food or free clothes. Well, there are actually a couple of problems with this. One is that if it's costly to produce, for example, gasoline or clothes or food and, for example, the government said, 'Well, those things have to be free,' there would be no motivation for any person to produce those things. In other words, you need the attraction of a price that covers cost to get those products in the market place.

"Secondly, studies show that people put a value - a dollar value, if you will - often times on a good or service commensurate with the price. And if the price is very low, they will tend perhaps to not pay attention to how much they use. They will perhaps waste that product or service. I think a good example now is water, which is becoming increasingly scarce in North Carolina. If water were free or very low priced, we wouldn't worry about using it. We would be frivolous in using it. As the price goes up, that gets our attention, and we have to be more frugal about our use. So prices do play a very important role in making sure we that we use resources efficiently."

Posted by Dave at December 31, 2007 08:00 AM