Basic Economics: Counting the Costs of Business

PART 1 OF 2:
A dispute about how tall the city of San Mateo, California, will allow buildings to be built may seem like a completely local problem that no one outside of San Mateo should care about. But the principle involved touches everyone from coast to coast, on issues having nothing to do with buildings, much less San Mateo.

Like most liberal and affluent California communities, San Mateo has a severe restriction on how high you can build, supposedly to prevent the community from looking like Manhattan. How is there anything wrong with that? Let me count the ways.

What is fundamentally wrong with this and a whole range of other government decisions at all levels is that no one is forced to count the costs.

If people want to build ten-story buildings but the law limits them to building five-story buildings, then there will be twice as many buildings required to house the same number of people. That means twice as much land on which to put the buildings.

In places where the land can cost more than the building itself — as in much of coastal California — that can mean that tenants living in the shorter buildings will have to pay twice as much rent to cover the higher costs created by height restrictions.

It doesn’t stop there. When a community cannot expand vertically, it expands horizontally, creating “urban sprawl.” That means more highway commuting and more highway fatalities.

One of the biggest arguments against tall buildings is that they generate heavier traffic. But spreading out the population generates more commuter traffic on the highways — and when that highway traffic reaches the city, it becomes street traffic.

Anyone who has driven in San Francisco during the rush hour will find little difference between the traffic jams in this city, with its height restrictions, and the traffic jams in Manhattan with its skyscrapers. If anything, people are probably commuting longer distances into San Francisco, where even the immediately surrounding counties have astronomical housing prices.

The point here is not that a particular policy in San Mateo or San Francisco is wrong. The point is that those who make such policies are not forced to count all the costs created by those policies.

Most people making most decisions, whether in government or in the private marketplace, have no idea in what way their particular preferences add to the costs. But, in the marketplace, the price conveys the end result — which is what matters for making decisions.

When you want to buy a car with a certain feature added, you may not have a clue on how that affects the way the car is built, or the additional time, effort and materials required. But you can depend on the additional price telling you the end result.

When I wanted to buy a telephoto lens for my camera, the local camera store had two available. Both had the same magnification as 300mm lenses and both were made by the same manufacturer. But one lens cost $900 and the other cost more than $2,000. Why? Because one lens let in more light than the other.

I am not an optics expert, so I don’t know all the ins and outs of making lenses that let in different amounts of light. But I know the difference between $900 and $2,000 — and that is all I needed to know in order to choose the cheaper lens.

Government restrictions are attractive to people who want to impose their pet notions without having to count the costs. There may be estimated costs — often disputed estimates — but there is nothing to force those estimates to include all the things that will become more costly because of a given policy.

Nor is there anything to force the original estimates to bear any resemblance to the actual costs that end up being paid by the taxpayers and others.

In the marketplace, you can believe that every additional cost your decision creates is likely to show up in the price tag. If the 300mm lens that lets in more light has to have more and larger elements made with more expensive glass, as well as requiring a larger carrying case, you can believe that the manufacturer is not going to overlook those things when he sets the price.

The government can overlook all sorts of costs — but those costs do not go away. There is no free lunch.