The Value Of Internalizing Costs

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Reply to reply on: Wars on Everything

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Hah, thanks. That truly would be an awesome superpower! It's kind of easy to have a general picture of a world where incentives aren't perverse. We just work backwards...

Right now we have the invisible hand in the private sector. If we replaced it with the visible hand...what would happen to private goods?

1. Variety? Plummet
2. Quality? Plummet
3. Cost? Skyrocket

In the public sector we have the visible hand. If we replaced it with the invisible hand...what would happen to public goods?

1. Variety? Skyrocket
2. Quality? Skyrocket
3. Cost? Plummet

If we want people to internalize costs...then we have to help them understand that they will be better off if they do so. We have to show them that "lunches" only increase in value when consumers can clearly see the (opportunity) costs and choose accordingly.

One image that comes to mind is a long line of people waiting to go inside a restaurant to get a "free" lunch. The people walking out of the restaurant are smiling and oblivious to the fact that they are wearing only their underwear. Chances are good that they wouldn't have thought the deal was so great if they could clearly see what it would cost them.

The fact of the matter is...deals are never great when costs are externalized. If people can't shop around for the best deals...then there's absolutely no incentive for producers to offer better deals.

Another image has two candy stores. One candy store says "Internalized Costs" and the other says "Externalized Costs". There's a kid in each candy store. Which kid is happier? The kid in the EC store walks out with one "free" candy corn. The kid in the IC store paid $.25 and walks out with a huge bag of candies.

Lots of superpowers are nearly impossible to develop. I really hope that showing people the value of internalizing costs isn't one of them.