Necessary Skills: Cost, Price, and Benefit Analysis

  • by Gitabushi

“TANSTAAFL” (There Ain’t No Such Thing as a Free Lunch)

  • Larry Niven’s favorite phrase for an extended segment of his writing career.

“If you’re not paying, you’re the product.”

  • phrase that describes “free” services like Facebook

One tool I think should be taught to everyone at some point in the education process (high school?) is cost/price/benefit analysis.

What I mean is simply this. For every action I can think of, and for any change to the status quo, there is always a price, a cost, and someone who benefits.

Let me explain.  No, that would take too long.  Let me sum up:

There truly is no such thing as a free lunch.  Someone had to pay for the food, and the payer usually attaches some strings to those who partake.  And as this article argues, the Facebook model isn’t as simple as Facebook selling users as the product.

The only way to truly understand whether you should accept a free lunch, and the best way to understand Facebook (versus, say Amazon) is by figuring out what the price is, what the cost is, who pays for both, and who benefits.

In the case of a free lunch, you benefit from a “free” lunch, but the giver must also benefit in some manner or he wouldn’t pay for it for you.  You have to figure out how the payer benefits before you can truly ascertain whether it is worthwhile for you to accept or not.

Moreover, in the case of Facebook, the price is the millions of dollars it takes to maintain the system. This price is paid by the owners of FB, from money they get from advertisers and other organizations who pay for data regarding the users, and these organizations get money from profiting off the information.  So, to an extent, you pay for Facebook’s service with your attention.  But the cost is a separate calculation: the cost is your loss of privacy, being inundated by the political opinions and Farmville notifications of people you haven’t seen in decades, and having Facebook run social experiments on you and manipulate users to support Facebook’s preferred socio-political causes and politicians.  You benefit from finding old friends and having easier contact with them, and possibly from networking.  But Facebook benefits from the billions of dollars of ad revenue and the power to influence millions of people as it sees fit.  It hardly seems a fair trade-off to me.

Compare this to Amazon, where the price is your annual membership, the cost is (at most), a loss of privacy regarding items you purchase, but the benefit is expanded choice and assistance in locating and purchasing things you want.  Amazon also benefits with revenue, but has plowed pretty much every bit of its revenue back into better service (Amazon Prime, Amazon Music, Amazon libraries, etc).  This seems like a much more useful business model.

The other reason cost/price/benefit is a useful model is because of the recent socio-political push for Free Stuff from the Government!

“If you think health care is expensive now, wait until it is free!”

Free healthcare. Free contraception. Free college.  Free phones.

Obviously, none of these things are costless. The price to the end user is free, and for Progressives, that’s apparently where their thought process stops.  “Free” is an easy sell: “I will ensure you have Free _______” is an easy promise for a politician to make.  He’s not spending his own money to do it.  And if the government declares it “free”, who is going to draw the connection to their tax contribution each paycheck?  Almost no one.

If, however, we were taught from a young age that everything has a price, everything has a separate cost, and service providers will always have a benefit greater than the cost of the provided service, maybe some of these immature seekers of Free Everything would stop and think about the cost behind it. Probably not very many, but maybe some?

Returning to health care for a moment, even aside from “Free” health care, the system is so expensive and so difficult to fix precisely because price and cost are not intrinsically connected, and the connection often seems to be deliberately concealed.  If everyone were taught to seek out the cost of a service as well as the price, then they would be accustomed to that thought process and could more easily understand the relationship between what they are paying for medical care and what benefit they are receiving.  And that greater understanding would make fixing the weaknesses and problems in our health care systems much easier.

Part of the “Cost/Price/Benefit” analysis should include why an entity has deliberately concealed the relationship between price, cost, and benefit.

This is particularly true for Federal Government services.  And the cost/price/benefit analysis reveals Federal Government exploitation of the cost/price/benefit disparity are particularly pernicious.

When a politician offers something for “free”, he really is just saying, “I will ensure *you* don’t have to pay the sticker price.”  But the politician knows there is a price.  He’s depending on it. He is just promising the sticker price will be borne by others, as part of sweetening the deal for you.

And that doesn’t even get into the cost.  The US Federal Government knows (even if any given politician may not) that Medicare does not benefit its enrollees. The US Federal Government knows (even if any given politician may not) that welfare benefits largely undermine the key elements that make a community safe and prosperous.  They don’t care.

Because politicians are in the business of solving problems. And the biggest problem they aim to solve is their own: getting re-elected. Everything else is a distant second, at best.

The politician benefits by buying your votes, and he doesn’t care whether you get a long term benefit or not.  The politician isn’t really trafficking in benefits, he’s trafficking in promises.

(Aside: This is what the Democrat Party does best: promises.  They rarely deliver, and never deliver on anything that benefits you.  And if they can’t get elected with a current set of promises, they are more than happy to increase the scope and scale of their promises at no extra cost!)

The price/cost/benefit disparity analysis is a very useful mindset.  It can be applied to everyday life (Nigerian Prince emails and care salesmen) as easily to new EPA or FCC rules.  Cynicism is the watchword.

Go forth and analyze.  Nay, do more than that. Go forth, analyze, and teach your children and anyone you can influence the same mindset.

It will make the world better.

I promise.

 

 

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4 thoughts on “Necessary Skills: Cost, Price, and Benefit Analysis

  1. Nothing here I can contend with. A sound analysis. But let me ask you, what’s your opinion on restructuring healthcare to make it less predatory and more about the science of it? What theories do you have about fixing the mess we have now?

    Liked by 1 person

    1. I could probably do a whole post on it, and probably will soon.
      Suffice to say I think we need multiple market reforms, but also to adjust the expectations of the populace. Too many people are only for reforms that let them get more benefits than costs, and the math simply doesn’t work out for that.

      Liked by 2 people

  2. A sound analysis: agreed.

    As you point out, educating the public will be a big part of this. Which the Press should be involved with, but they are actually part of the problem.

    Liked by 1 person

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