Friday, January 22, 2016

Subjectivity of Costs and Benefits or Why Minivans are Cool

On Tuesday I wrote a post on the economics of everyday life. The image below inspired me to write about the economic principles at work in my own life again today.

This image was posted by a friend of mine who is part of a select group of young adults. He and his wife are D.I.N.K.s which stands for "Double Income No Kids." Since he's not a drummer in a Rush tribute band, he has little reason to own one of these fine machines. However, there are obviously good reasons to own a minivan, otherwise no one would.

When I got my first job after grad school, my wife and I bought her a car. She wanted something fairly big since, at the time, our son was a toddler. We needed a family hauler, but she wanted something cool. This is what she got.

She really enjoyed driving her Charger. It had a lot more power than her previous car (a 1995 Oldsmobile) and looked a lot better too. But, as you might expect, our little family grew.

That was about a year ago. Since then, we've traveled home a couple of times (about 2000 miles round trip each time) in the Charger. When we went home for Christmas last month, we finally realized our fun-to-drive Charger wasn't cutting it anymore. So, after trying out a minivan while the Charger was in for a recall issue, we decided to trade in the Charger for a bigger family hauler.

While my wife misses her car, she absolutely loves the convenience of the minivan. The sliding doors are handy for getting the kids in their seats in crowded parking lots, she can see the road much better due to the minivan's height, and it rides much more smoothly than the sporty Charger did.

So where's the economics lesson? As different as these two vehicles look, they were priced roughly the same when they were new and, since they happened to be the same year and had the same mileage, were roughly equal in value when we traded. The lesson isn't really about the prices of the two cars.

What this story illustrates is the subjectivity of costs and benefits. My friend the D.I.N.K. would likely bear an immense cost to driving around in a minivan since most of his D.I.N.K. friends would probably laugh at him. He has very little use for the cavernous interior and rear-seat DVD player, so the benefits of owning a minivan would not likely outweigh the costs for him.

For my wife, on the other hand, things are much different. The DVD player and huge interior are tremendously useful to our family. Since most of her friends are moms as well, she doesn't have to deal with the costs associated with the social stigma my D.I.N.K. friend does. The benefits of the big blue van outweigh the costs for her.

The key here is that costs and benefits are subjective. Without an understanding of the context within which economic activity occurs, we might be confused by the actions of those around us. The situation described above is pretty simple, but, as with other aspects of the economic way of thinking, the principle can be applied in many situations.

A recent EconTalk podcast featured Cornell University economist Robert Frank on "Dinner Table Economics." One puzzle they discussed is the fact that men rent tuxedos for their weddings while women typically buy their gowns. Many men would get at least a few uses out of a tuxedo over their lives, but most brides wear their gowns once and promptly pack them away. We might be tempted to conclude from this that wedding shop owners are deliberately leaving money on the table, perhaps because they like to exploit women who pay thousands of dollars for a dress, and that some wedding shop owner could make a lot of money by renting out dresses.

However, as the host and Frank note, there's likely a "hidden" cost hanging around in the scenario that the conclusion above doesn't take into account. I'll leave the punchline out, but if you think about it for awhile, you'll probably be able to figure out what that cost probably is. The point here is that the costs and benefits aren't always easily identified by an outside observer because costs and benefits are subjective. Understanding this point is important for getting a grasp of sound economics and for intelligent policymaking.

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