Scarcity and Choice
A number of cities in the United States have begun providing "free" needle exchange programs for drug users, especially among their homeless populations. Generally, it is believed that the sharing of dirty needles has increased the incidence of the HIV virus among drug users. Are these needle exchange programs really "free?"
What costs are borne by various individuals and groups in these free programs? Why are individuals and groups willing to bear the costs associated with these programs? (What are the benefits?)
The first thing, to acknowledge in the analysis of any "free" program or good is that nothing is really free. All actions have costs, opportunity costs, associated with them. An analysis of the opportunity costs associated with a needle exchange program should start with what must be given up to provide the program. This would include what other programs or services were cut or foregone in order to initiate the needle exchange, laws or policies that had to be changed to initiate the program, or people who had to be convinced that it was all right to give away needles for drug abuse.
The choice to have a needle exchange program is a decision not to do something else. If the exchange program is operated by a government agency, (local, state, federal) then there is a wide variety of other things that could have been done, such as food or shelter for the homeless, cancer research, road repairs, aid to college students, national defense, etc. The list of possible alternatives is almost endless. It is important to remember that it is the next best alternative, the specific program or activity that was not done because the needle exchange program was initiated, that is the opportunity cost.
The opportunity costs for a needle exchange program are not unique to a government sponsored program. Privately sponsored programs face the same dilemma of having to choose to not pursue some other use of donated time and resources because they are to be used for a needle exchange program. A good question for discussion might be whether or not government exchange programs cost less than private exchange programs? This can only be answered through an analysis of the opportunity costs of each program.
The costs of a needle exchange program are not limited to providing the program. What about the cost to those using the "free" needles? Drug users will also face opportunity costs when taking old needles in for exchange. This can be the expense of traveling some distance, spending a good deal of time standing in line, having to get to the exchange facility at prescribed hours of operation and the stigma of publicly admitting drug use by virtue of needing clean needles.
If the programs are not free, why are people willing to bear the costs? The answer to this question is not necessarily the same for any individual or group. While one may be able to identify some costs in specific monetary terms, when the benefits are considered they are very difficult to quantify in monetary terms. There are direct benefits to the drug users who will get the needles, however as noted above we cannot assume that those benefits are costless or even that the benefits will be greater that the costs for the drug users. This may explain the resistance to the needle exchange programs that have been experienced in some cities.
Who else benefits from these types of programs in addition to drug users? Other individuals, the
community, the nation? What are the benefits that they receive? It may be the knowledge that they are improving the quality of life for the drug users through helping to prevent them form getting AIDS, it may be a desire to keep down public health costs by limiting the number of people who get AIDS, or it may be a "protection" from having the AIDS virus spread to a broader segment of the population and infect non drug using individuals and families.
Incentives, Profit, and the Entrepreneur
Sometimes when a poor financial or planning decision is made in a school district someone will pipe-up with "that's no way to run a business." No, it is not, because schools don't run like businesses and schools don't try to make profits. But what if schools were businesses?
If you wanted to get into the school business how could you make a profit? Discuss some of the aspects of running a school business: What exactly is your product? Would that product be the same for everyone? What price would you charge for education? Who would your competitors be? Who would your customers be? How much, or on what basis would you pay your teachers? What other decisions would you face?
Businesses make profits by having, total revenues that exceed total costs. Total revenues may include it, intrinsic benefits beyond monetary revenues. Likewise total costs may include opportunity costs of career change, relocation, work hours, etc. that go beyond the monetary costs.
For a school to be a business it will need a residual claimant or claimants, who are willing to take on the risk of financial loss and the opportunity for financial gain.
One key to being a successful entrepreneur is understanding who your customer is and what they are expecting from you. The customer for a school seems to be specific parents of the children who attend. This is different than the notion that all of society supports, and should have a voice in, the schools and the education system. If the parents are the customers then are some parents (customers) more important that other parents? What about the family with ten children? Another question to answer is just what is the product of your school? Is it "education" that is somehow a measurable outcome and you can tell simply by testing whether or not the customers received their moneys worth? Or is it an opportunity to learn, with the inputs to the experience being the measure of the product value?
The questions of products and pricing are often dependent on the nature or level of competition that a business faces. If there are a number of schools close by where parents may choose to send their children then it may be necessary to identify a niche in the market to target, such as trades, top end students, athletes, artists, etc. This differentiation of the product would develop so that the schools could attract customers on the basis of something other than the lowest price. The question of pricing is usually impacted by the level of competition within the market. There will always be a "market price" for education, but that price is affected by the opportunity cost of obtaining other education, the desire for consumers to have an education and the income level of the consumers who want the education.
The area of cost control and wages or salaries is usually very important for businesses. Businesses know that they will have to pay for labor and resources in providing goods and services. The more productive the labor is, (output per dollar of production expense) the more money the residual claimant will have as profit. The students may want to discuss the importance of incentives for workers such as teachers and aides to increase production of education at a privatized school.
A final point of discussion, and decision for the entrepreneur is just how high of quality of product will be produced. What quality of education will they choose to produce and how will that quality be measured? Very few businesses produce the very best product that they can because they could not sell it at a high enough price to cover their costs. Consequently, decisions must be made on the level of quality, it's cost and the price at which the product can be sold.
Actions of Government
Many laws that have been passed recently (such as the Family and Medical Leave Act) or are currently under discussion (most proposals for national health care reform) include mandated employee benefits. These are benefits that the law requires employers to provide for their employees.
Some examples of employee benefits currently mandated by federal or state governments include: up to 12 weeks a year of unpaid, job-protected leave, with medical benefits, for childbirth, adoption, or illness of the employee or a family member; protection against application of a mandatory retirement age; a minimum legal wage; application to part-time employees of all benefits provided to full-time employees; "reasonable accommodations" to a job or workplace that will permit individuals with a disability to perform the essential functions of the job.
What are the effects of mandated employee benefits? What groups would you expect to be better off as a result of them? What groups would you expect to be worse off. Can the implementation of mandated employee benefits impose unwanted costs on the employees? Can you think of times when employees might not want benefit coverage? Do employees claim all of the benefits that they are entitled to? Why or why not?
The first step toward analysis of mandated benefits is the recognition that it is in the interest of employers to provide some employee benefits. Employers don't have to be required by law to provide benefits that they think will generate profits for them.
Employer provision of health care insurance to employees became common after World War II in large part because employees did not have to pay taxes on this benefit. If income and social security taxes take 20% of what an employee earns in wages, an employer must incur a cost of $1.25 in order to pay workers $1.00. But a nontaxable benefit puts $1 in the employee's pocket at a cost of $1 to the employer. That encourages the employer to substitute "fringe benefits" for money wages.
The preceding argument assumes, however, that the fringe benefit has a benefit to the employee equal to what the employer pays for it. That will generally be the case with voluntary fringe benefits, because it would not be in the interest of the employer to offer a benefit that cost more than its value to the employee. It will often not be the case, however, with mandated benefits. For example some small employers elect to not offer health insurance as a fringe benefit because their employees are young, and healthy and would prefer to go without health insurance in return for a high money wage. If the law mandates health insurance, these employees will be worse off.
Mandated benefits impose costs on employers in excess of the benefits to them-unless we believe that employers who chose not to provide the benefits voluntarily were ignorant about their own interests. Employers will respond by trying not to hire people who will have to be paid these benefits. They will reduce total employment and contract out more work if they find the net cost of hiring employees going up because of mandated benefits. For instance if mandated pregnancy leave causes a costly disruption in a small shipping and receiving department an employer may contract out this work to a large firm where the pregnancy leaves would not be as disruptive on production.
Any law that increases employer costs more than it increases value to employees through benefits will tend to reduce employer demand by more than it increases employee supply, thereby reducing employment and lowering net real wages.
Copyright © 1999 Foundation
for Teaching Economics
Permission granted to copy for classroom use.