Almost every psychologically normal human is delighted to hear about products everyone can enjoy free of charge. “The schools are free!” “Health care is free!” “Lunch is free!”
According to basic welfare economics, however, gratis goods are almost automatically inefficient. Unless the marginal social cost of the product miraculously happens to be zero, setting a price of zero leads to socially wasteful behavior.
So what makes “free” so beloved? The simplest explanation is that people are reacting selfishly. When someone says, “Oh great, free stuff!” they aren’t assessing the social desirability of the outcome. They’re saying, “Oh goodie, I don’t have to pay for this.” But this explanation is quite implausible, because people are also pleased to hear about free stuff even when they’re personally ineligible to receive it. Think about how often Americans gush, “In Canada, X is free!” Furthermore, even from a totally selfish point of view, free is often a bad deal overall. Making products free ultimately requires higher taxes, and often leads to shortages and lower quality.
A better story is that people are taking transactions costs into account. Free is almost never first-best efficient, but it can easily be second-best efficient. Suppose, for example, that the marginal social cost of adding another car to the road is $.75, but the cost of collecting a toll is $1.00. On balance, it’s less inefficient to let people drive for free than impose marginal cost pricing.
On reflection, however, this story is also quite weak. If it were true, people would be pro-gratis for products that are cheap to produce. In reality, however, what most excites and delights mankind is gratis products that are expensive to produce. Free health care and free education are far more popular than free toothpicks.
The most charitable explanation is that people like making goods free because it’s a politically palatable way to redistribute with dignity. If only the poor receive free health care, the story goes, we’ll stigmatize the beneficiaries. They’ll receive sub-standard treatment at best. In the long-run, even this sub-standard care will be forever vulnerable to repeal. Once we make health care free for everyone, all these problems go away.
But this story, too, is shaky. Empirically, it’s far from clear that means-tested programs are markedly less popular or politically stable than universal programs. Whatever their subtle disadvantages, means-tested programs have an obvious advantage: Helping the needy is far cheaper than helping everyone. Finally, if it really were true that we have to help everyone to help anyone, that would be a potent argument against helping anyone! As I explained a while back:
Economists habitually mock protectionism for its high cost-benefit ratio. “$265,000 per job saved! How ridiculous.”…
Notice, however, that we can easily ridicule universal social programs in exactly the same way that we ridicule protectionism. Suppose two-thirds of the population is perfectly able to provide for its own retirement and health insurance. Then the budgetary cost of cloaking welfare for the bottom one-third in universal garb is triple the apparent cost. And that ignores all the disincentive effects of the extra taxes and giveaways. Add it all up, and you could easily get a number in the protectionist ballpark. Think: “$100,000 per retiree lifted out of poverty! How ridiculous.”
Even if I’m wrong here, the “Make goods free in order to redistribute with dignity in a politically palatable way” argument is far too sophisticated to explain popular affection for gratis goods. So what does explain this affection?
The most credible explanation, as usual, is simple-minded populism. We’re sick of paying for stuff! We don’t want to hear a bunch of bean-counting excuses about the budget! Stop being greedy cheapskates and just give it to us for free! Efficiency means we have to set every price equal to marginal social cost. But our knee-jerk impulses say, “Shut up and fork it over.”
P.S. Does (first-best) efficiency really requires us to set every price equal to marginal social cost? In theory, price discrimination could achieve the same result; we only need the marginal consumer to pay marginal social cost. In practice, however, we’d need telepathy to actually achieve this. After all, if a driver says, “There’s no need to charge me for my pollution because I’m already driving exactly as much as I would with an optimal pollution tax,” can you really take him at his word?
P.P.S. I’m speaking in Berlin the morning of December 6. Hope to see you there!
READER COMMENTS
Mark Z
Dec 3 2018 at 4:13pm
Well, when it comes to people liking free stuff personally, self-interest is clearly the simplest explanation. Even if the offering of the good for free is, in the long run, detrimental to me, at the point of ‘purchase,’ I’m still better off getting it for free. In that case, it’s a classic prisoner’s dilemma situation. What’s in each individual’s interest at the time he or she purchases it (or gets it for free) is not what is overall best for everyone.
This likely explains a lot of the political clamor for free stuff too. If 51% of people can transfer $1 from the remaining 49% to themselves, even if the transfer cost is $5, it’s still perfectly concordant with the interests of the 51% to do this even if it’s, in net, terribly inefficient.
The only thing that really requires explaining is why so many wealthier people demand ‘free’ things from the state. The ‘bulverist’ explanation perhaps is that they believe they are being generous toward their lessers, but being generous in the least costly way (they don’t actually have to give anything, and what they support or vote for – unless they’re really powerful – is irrelevant anyway). They show the world how generous they are at no cost; alternatively – and I think this is definitely true, though perhaps not explanatory here – people may pathologically underestimate their own wealth. Many upper middle class people genuinely believe they’re “workers” whose interests coincide with those of the poor, against the ‘rich’, meaning billionaires. They mistakenly think they’ll be among the takers eather than givers in the redistribution.
The non-bulverist explanation: many people simply believe that having the state tax and give away for free reduces transaction costs by enough to offset the inefficiency. This is basically the simple version of the pro-socialized medicine argument.
Alan Goldhammer
Dec 3 2018 at 4:46pm
Enjoy Berlin! It doesn’t look like there are any Wagner operas for you at that time but the State Opera is doing Beethoven’s Fidelio on December 7. that would be good one to see.
RPLong
Dec 3 2018 at 9:56pm
That sounds wonderful.
John
Dec 3 2018 at 6:48pm
I dear you’re giving people far too much credit for logical thinking. The truth is, due to framing, people pay a lot of attention to the very salient free thing, and minimal attention to the true cost.
They don’t say to themselves “ah in Canada they’re applying an effective trade-off wherein paying for health insurance via taxes is preferable to paying an insurance company directly.” They’re just thinking “ah Canada is a bountiful land where health care is free unlike here where it’s very expensive.”
Mark Z
Dec 4 2018 at 12:48am
I think that’s probably where people start. Once they’re exposed to the idea that costs are merely being shifted, they (the sophisticated ones at least) usually do argue that the centralized system is more efficient. Advocates of “free” medicine, hence, argue that Medicare has lower administrative costs than private insurance companies (as though that were a sound comparison).
Of course I do think usually that’s more a post hoc rationalization for a visceral position than the original reason for it, but it can be difficult to distinguish the two sometimes.
Various
Dec 3 2018 at 11:34pm
I agree with John. As a CPA and finance professional, I know from experience that even supposedly sophisticated investors often make simple mistakes that are real whoppers. For example, financially savvy folks often cite federal government debt at around $20 trillion, when the real number, adjusted for off-balance sheet liabilities, is probably north of $100 trillion. You are expecting too much of ordinary citizens to understand the reality behind “free” stuff
Phil H
Dec 4 2018 at 3:34am
I think Caplan is missing one trick. There is a desire to have things not be monetised/marketised, which I don’t think should be ignored. The idea of having the air that we breathe monetised is unpleasant, not because it might be inefficient or might harm certain people, but just in itself. Free speech should not be monetised, because it’s a fundamental right. Love cannot be monetised, because it fundamentally cannot be quantified. The idea of a public space really depends on space not being monetised, because as soon as you monetise something, you put controls upon it; and as soon as you create those controls, you create the capacity to abuse them and to control public space in a non-democratic way. I know that markets aren’t inherently undemocratic. But the guarantee of democratic freedoms is that we don’t even create the mechanisms by which they could be controlled.
With healthcare, I believe this is the primary driver. Before any considerations of markets or efficiency or compensation, a statement like, “Isn’t it great that they have free healthcare in Canada,” is a statement that this person wants healthcare to be an absolute good, guaranteed by laws or the state, and so (at the consumer level) not even drawn into the complexities of monetisation.
Now this may be a category error. Freedom of speech is a negative right; free healthcare is a positive right. They are quite different. But there are precedents. Access to justice is a positive right (i.e. one that requires a large complex system of people to do work and to donate their work to all comers at zero immediate cost), and we manage to do that as a society.
I think this wish for healthcare as a right informs much of the love for free healthcare – but I agree with Caplan that simplistic populism or greed are also important factors.
Jon Radford
Dec 5 2018 at 5:59am
“Do not bind the mouths of the kine that tread the corn” – or to put it another way if you require the well off to provide a 100% subsidy for the less well off, then it is only human nature for them to say that they want a share of the bounty they are being forced to provide.
This is not a rational economic argument, it is a deep seated emotional response that, in most cases, is not susceptible to rational analysis; and one that politicians (if not economists) ignore at their peril.
By the way, here in the UK 55% of the working population receive more from the state than they pay in direct taxes on income, which leaves only 45% in the better off class. As one of the 45% I defend my “right” to “free” healthcare whether or not it is economically efficient.
Hazel Meade
Dec 7 2018 at 4:06pm
Many people do not understand that people’s behavior changes in response to incentives, and that giving things away counts as an incentive. It is too complicated for people to process the fact that the system is going to dynamically change in response to their actions – they can only process the system as a static system: Transfer goods from point a to point b – nothing else changes. The rich person has less and the poor person has more. Processing how that is going to affect people’s actions in the future is way more complex than most people can handle.
David S
Dec 8 2018 at 10:45am
The problem I have with “means testing”:
Currently, virtually all financial assistance given to ivy league students is means tested. What this has lead to is the current situation were the vast majority of students pay extremely little for their education, while my daughter has to pay full price.
The problem is that “full price” no longer has any checks and balances on it. If I don’t pay, another non-paying student will take her place (or another super-rich student, I suppose).
So “means testing” will lead to people just beyond the cutoff being fleeced, because the voters don’t pay for anything anyway. I believe in the past this has been refereed to as “the plebs discover that they can vote themselves bread and circuses without limit”.
Currently happening in higher education, although the vote is somewhat obscured.
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