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YOU DECIDE: Are the best things in life free?

December 14, 2007

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

Like most of you, I've been buying presents for family and friends during the holiday season. Of course, retailers rely on spending during this time of year for a significant part of their annual revenue.

Yet there's an old adage that encourages us to look away from prices and profits and consider more intangible, yet very important, gifts, such as sincerity, honesty, love and compassion. In fact, many say traits like these, which don't have price tags, are really the best things in life. For them, we can focus on their quality and meaning without worrying about any cost.

So wouldn't it be nice to extend these free "best things" to other products and services, like gasoline, health care, food and a college education? Wouldn't it be nice if all the necessities required in today's economy were also free?

Well, this is where the reality of economics splashes cold water on our faces! Perhaps this is one reason why economics is often referred to as the "dismal science."

Because, believe it or not, economists argue that prices actually serve a good role, for both producers and consumers. Without prices, we wouldn't have many of those everyday "good things," like food on our plates, a roof over our heads and clothes on our backs. And even if we did, without prices we wouldn't appreciate them as much.

Let's look at the benefit of prices first from the producer, or business, side.

I think you'd agree that valuable products are costly to produce. For example, to put gas in our cars, oil must be pumped from underground reservoirs, transported sometimes halfway around the world, refined into gasoline and then distributed to retailers for purchase. If firms along this chain of production weren't able to receive a price that covered their costs, they wouldn't go to all this effort, and our cars would sit idle.

Furthermore, an increase in a price is often beneficial because it ensures a larger supply of the product later. Again, look at today's oil market. The rapid industrialization of developing countries - particularly in Asia - has spiked world oil use and led to record high oil prices.

But the upside of the higher prices is that they have created a stampede by producers to find more oil supplies. Exploration for new oil fields and the conversion to oil of previously untapped sources such as oil sands and oil shale are now in high gear and will result in more oil supplies in later years. Plus, without higher oil prices, there wouldn't be today's push to develop alternative fuels.

For consumers, prices are a way of communicating value, of making consumers realize some sacrifice was needed to make the product or service available. In turn, paying a price for a product or service motivates consumers to use the product carefully and not waste it.

A personal example might illustrate this idea.

When I was a teenager, my father gave me a hand-me-down car. I was excited and proud to have it and drove it for a couple of years. However, my next vehicle I bought myself with money I had earned at a restaurant. I regularly changed the oil, cleaned it and kept it in top running order, things I hadn't done with the first vehicle.

Why did I behave differently?

I think it was because I paid a price for the second car, whereas I paid nothing for the first. Paying for the second car allowed me to connect the dots between working at the restaurant and getting something good (the car) for my efforts. And I wasn't going to waste my hard work by not taking care of the car. Interestingly, studies of college students show those paying their own tuition "take care" of their education more by graduating on time at a higher rate.

None of my comments should take away from the importance of un-priced ideals, values, and character traits that are commonly held in high esteem. On a personal level, I agree that these are the "best things."

But for other, more mundane needs, you decide if prices actually help more than they hurt.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html

Posted by Dave at December 14, 2007 08:54 AM