Opportunity Costs

I've reluctant to write this because I think the way of thinking I'm going to argue for here is depressing. It will make you think that you're having less impact on people's lives--which gets distorted into feeling that you are less important. That is most people's visceral reaction. But the upside is that when you use this method to count costs and benefits you (should) be able to better limit costs and create benefits.

Let me start with a story. Angela held a fundraiser at her high school. She and her friends sold 500 cookies for $1 each after school and then sent the money to an NGO that used it to buy 50 children anti-malaria bed nets. Bill wanted to do more. Fundraisers at his school were never going to generate more than a few hundred dollars. But he noticed that there was a competition for high school students to propose a way to "Do Good" and the winner would get $5,000. Bill wrote a proposal to use the $5,000 to buy 300 nets and use the rest to pay to fly to Ghana and distribute them. He won the grant in a close vote over a proposal to spend the money deworming children in Ghana.

Who did more good?

Bill got 300 people nets. Angela only got 50 people nets. Isn't it obvious? No.

If it seems like the statement about the number of nets is the end of the story then you've fallen for one of the most pervasive problems in debate. That statement just listed the benefits--and completely ignored the costs.

And in this case that makes all the difference. The real cost of something is the value of what would have happened otherwise. If Angela didn't organize the bake sale she might have spent the extra time playing volleyball. She also might have prevented the Girl Scouts from selling cookies that today. Compared with the value of saving a (many?) lives, those costs are negligible so maybe it's safe to ignore them.

Bill, though, caused the proposal for deworming not to get funded. The deworming plan was probably of comparable value (perhaps more, perhaps less) meaning that while Bill "saved" perhaps 2 lives he also caused 2 lives not to be saved. The benefit was 2 lives, the cost was 2 lives, and the net benefit (benefit - cost) was nothing. Bill's plan may have done nothing make the world a better place, while Angela's almost certainly did.

Angela, by construction, did more good.

That story is just meant to be an example. Of course it's fictional. And of course the assumptions matter. But it's illustrative. Whenever you apply for a grant you're causing someone else not to get it. The net benefit is only the good from your proposal minus the good of the one that would have been funded. If you open a Fair Trade store right next to another store, and you decrease the business of your neighbor by $5,000 a month while only doing $7,000 yourself, then you've only netted $2,000 in Fair Trade sales for the world. (Of course the distribution of the money could be important too--maybe your suppliers are more desperate and benefit more.)

Too much of the time we don't think at the margin.

Quote of the Day

In only two years . . .  more than 122,000 Floridians have saved $5 million dollars in prescription drug costs.

That is Charlie Crist's webpage on his big achievement in health care: the Florida Discount Drug Card. Many seniors are using the $20.49 a year savings to fulfill lifelong ambitions like visiting Vatican City or attending a game at every MLB park.

Uncompetitive hospitals

There is a simple little game about lemon stands that they teach about in game theory classes. The setting is a beach where thirsty swimmers are scattered about. You want to put your stand where you can maximize the number of customers, given that the customers just go to the closest stand.

If no one has placed a stand you can put yours anywhere, although if the customers are deterred somewhat by walking you'll place it in the "middle" where you'll have the highest demand. If there is already a competitor's stand on the beach, where should you place your new stand? After some careful consideration you decide that you need to place it right next to the other stand because you'll take all of his customers one side and that's the best you can do.

This game is meant to illustrate why gas stations tend to be so close together and supermarkets are often right across the street from one another. Well, they are in Florida anyway where competition is cutthroat. In my hometown there is even a Lowe's that was built right across the street from Home Depot.

The lesson, then, is that in a competitive market stores are going to tend to cluster in the middle of the populace and do battle to win customers. At least until Wal-Mart crushes them.

With this in mind I was wondering why the three hospitals in my hometown are spaced so far apart. And why are they are right on the edges of residential areas? One is North of 95% of the houses, one is south of 95% of houses and one is East of 100% of the houses. They're placed as if the town was carved up by a cartel and each hospital has its own section. If health care provision was competitive shouldn't the hospitals be located closer to the heart of the city, side-by-side?

Or wait, maybe the health care sector isn't competitive. Could that have something to do with the outrageous costs?

Note: File this post under "musings not backed by careful research or good data."