Free Stuff is Expensive!

A little background

    Something universities like to do to make student life more fun, is to throw alcohol-free parties to get students to come out and have a good time. The weather was nice and my wife was catering the event, so I figured I'd show up. Just by chance, I saw a few of my lab-mates walking up to the line for some free food, and I joined them.

My friend was fairly excited about the free food. "It's great right, this is all free!"

Being an economics nerd, I couldn't help but respond, "You think so? I heard we are all paying for it!"

His mood quickly changed! "What, we have to pay?"

"Yes, and it's much more expensive than the normal price!"

I have to admit I'm a bit of a prankster. He was actually quite shocked at this point. "What do you mean it's expensive? If I have to pay extra, I'm not going to eat at all! Are they really going to charge us?"

"You bet they did; in our student activity fee!"

    And that's just the point; if we knew how much "free" stuff costs, we wouldn't take it. While we weren't charged directly for the free food, we are being charged whether we take it or not through student fees and tuition. Since my wife works for the school's catering company, she sees examples of these events all the time. But beyond this, any time we hear about "free" education, "free" healthcare, or "free" anything, it's really "much more expensive stuff that you will pay for through a fee, tax, or inflation."

 

The free food case

    Let's look at this free food example. Usually, the manager of our local Panda Express charges a set amount for food sold at his stall, and adds a premium if he has to cater it. There's a good reason for the extra cost: he has to find people to work irregular shifts, and may have to pay overtime. Also, since catering doesn't fit into his normal supply ordering, he has to charge for the extra time taken to handle the order. So, to have a "free" event, the organizers already have to pay a premium based purely on the fact that they are ordering catering. If a party was pitched as a "pay more than normal for the same food party," much like my friend said, no one would come. But, there's one more cost involved; administration. Depending on the type and size of campus event, the organizers are paid with money that ultimately comes from the students. Further, the school has to handle the money taken in student fees, and has to handle accounting for disbursement of that money for event organizers. This adds a significant cost to the event.

    Most students don't realize that free stuff is expensive, but for those of us who do (and for the ones who were enlightened that night!) there's a cumpulsion to show up anyway because you have to pay the fees regardless of whether you participate. Even though the grad students in my department could through two dozen big parties for the department every year if we didn't have to pay fees, we have to settle for a handful of stuffy "free" ones. And this, in my opinion, is the true cost of "free" food and events; you could do a number of other things with that money, at a much lower cost, and to top it all off, you could decide how the money is spent!

    But wait, there's more! In the case of free food at a university event, free stuff is more expensive because of the extra costs associated with administration only. But what if you took it a step further and made that free thing an entitlement? At this point, the price of free goes into the stratosphere!

 

The high price of free entitlements

    Naturally, a few folks might be aggravated when I talk about the sacred cows of entitlement programs, but my interest as an educator demands that I find the most affordable means possible for delivering a great education to the most students at the lowest cost to the student and to society. And this is why I have a problem with most "free" entitlements. When people are said to have a "right" to something like education, the government is obligated to put up the money for those who can't afford it. Of course, since prices naturally vary, the government also has to accept that some providers will charge a higher price than others.

    This is where the moral hazard comes in. Once a supplier of entitlement, such as a university, figures out that they can charge up to a maximum amount in an entitlement program, they will immediately charge that amount by finding a use for the extra money. After all, if tuition is $12,000 a year and students can get $13,000 in guaranteed loans and scholarships, why not charge $13,000? The extra money can go into things like fancy dinners for prospective students and for an extra gym that will be supported by mandatory fees. The expenses are "necessary," after all. If there's a shortfall, extra money can be extracted by putting the actually important functions of the school, like teachers, on the chopping block first.

    Since the influx of money is guaranteed, there is no real need to think of how to make an entitlement cheaper. After all, we can always raise taxes! But the real result is that the cost of something entitled is much more expensive to whoever has to pay. If we look at university education, for example, there is a correlation between cheap money in the form of guaranteed loans and grants, and rapidly rising costs of tuition.

    The same idea can be applied in other areas. Any time you see something being advocated as "free" for some people, the end result is rising costs for everyone else, which begs the question: does trying to guarantee anything as "free" or "low cost" really lead to lower costs, or instead at much higher costs that are masked by taxes and administration?

 

If free is expensive, how can we provide education, health care, etc. for all?

    With any luck, the same way we're hoping to provide free educational material through sites like this, and in the same way that Wikipedia has created what is arguably the world's best encyclopedia for free. We can provide food, goods, education, and healthcare for the poor when we create private charities that are carefully monitored by donors who are free to withdraw support the moment the organization's leadership steps out of line. This is why I've put hundreds of hours of my own time into this website, along with quite a bit of money.