Economy and Government and Technology

ECONOMIC ANALYSIS: How we all pay the price for things that seem free

November 7, 2005

There's no such thing as a free lunch, goes the familiar cliché about economics.

That old phrase is meant to impart the simple idea that anything that consumes resources imposes a cost, which is certainly true. But a little tweak of the wording produces a much more powerful insight. That's to say-to an economist's way of thinking, at least-nothing should be free.

Those dour sentiments doubtless explain why economists don't get invited to many parties. Free goods abound in our economy, and we Americans can't wipe the smiles off our faces as we enjoy them.

There's no charge for the entertainment on broadcast radio and television. We make as many phone calls as we like on our wired telephones in our homes, at no extra charge. And did you ever see a fast food restaurant charge you for napkins?

If I were king for the day, there would be prices on all these things. And you can bet it would be a very short reign. For we've grown accustomed to things we clearly value being made available for free for so long that we think of it as a birthright.

Yet these traditions yield some nontrivial distortions in our economy, and ultimately we all pay the price. Let me give a few examples.

With the exception of a handful of toll roads, we drive for free in America. Taxes pay for the roads, of course, and we certainly contribute to that public support every time we buy a gallon of fuel.

But no one charges us for the use of any particular road, and thus the choice of which road to use, and when to use it, is unaffected by a price-because none exists.

But we should pay for the use of roads, for at least two reasons. The first is congestion. Our use, say, of Interstate 465 in Indianapolis or the Borman freeway in Lake County at peak commuting times imposes serious costs on other users, from slower everyday transit times to occasional expensive and disruptive expansion projects. As drivers, those costs should affect our decision to use the road, and time-of-day pricing of roads would accomplish this.

The second is maintenance. Our vehicles cause wear and tear on road surfaces, requiring routine and occasionally expensive maintenance. But some vehicles cause more damage than others.

Fuel taxes and vehicle registration fees don't capture this adequately-we need road prices that reflect more precisely the costs our vehicles impose on the infrastructure we consume.

And if that idea didn't upset you enough, let me take on another sacred cow-subsidized residential phone service.

Regulation has produced a situation where most of us pay less for our residential phone service than it costs the telephone company to provide it for us. In part, that reflects the desire of government for the benefits of "universal service," where everyone has a phone.

But it reflects politics as well. The subsidy is made up by pushing those costs upon business customers.

The result is that businesses costs are unnecessarily high, affecting productivity and competitiveness. Which is why new entrants into the telecommunications marketplace-ushered in via deregulation-have largely gone after the business side of the market.

Because residential prices are artificially low, it has taken new technology that offers a quantum leap down in costs, like voice over Internet protocol, to bring lower prices to homeowners.

Thanks to technology, we can and do charge for things that were unthinkable a generation ago. And, sentimentality aside, we're better off for it.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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