DLC Blog

Prices

Have you ever thought something costs too much? How much are things really “worth,” anyway? I bet that any of you who complain about a price hike in clothes or CDs never really think about the other end of the spectrum, that we can get a hearty loaf of bread for only one or two dollars, or that you can keep a room brightly lit with a light bulb that costs $2.50, paying only twenty cents of electricity a day (however I encourage you not to waste electricity)!

Think of how different our lives would be without electricity. We could only work in the daylight, which in a Washington winter amounts to just 8 or 9 hours a day. After sunset, you couldn’t read or do homework. No homework? Sounds good to me! Just kidding…

But seriously, if you wanted to turn on the heat, it wouldn’t be there! You would have to chop down a tree, split it into small pieces, dry it out, and then light it on fire. This is assuming you already have matches and a safe, high-quality fireplace. Huddling around the fire to keep warm, you couldn't do much of anything. Soon the smoke would make it hard to breathe. Upon falling asleep, if the fire went out you would have to start the whole thing over or be extremely cold.

Luckily, we do have electricity and gas to make heat and light. So we can work and sleep pretty much whenever we want, and the difference between winter and summer vanishes as soon as we step inside. You might pay an average of $50 a month to keep a small house or a large apartment lit and heated, which is a great bargain if you consider the wood-chopping alternative. On the other hand, a large family in a bigger house might have to spend more than more than $1500 a year to keep the lights on and the kids warm. The question is, how can something so amazing as electricity be so cheap? Or from a different perspective, how can something as basic to our needs as electricity be so expensive?

Prices are not “set” by some governing body, they are rather a general agreement about how much things are “worth.” Why didn’t anybody ask you or me to agree how much things should cost? I wouldn’t have agreed to pay $80 for my winter coat; I think that the coat company cheated me! The problem is that they won’t make coats unless they can make some money for themselves, considering that they must purchase materials to sew the coats, machines to do that work, pay employees to oversee the operations, and then buy a truck to distribute the finished coats (or pay contractors along the way to do things for them). Then, whichever store sold me the coat has to buy a bunch of coats, rent a store, and pay the heating and electricity bills for the store alongside the salaries of their employees. The closer you are to the source of production, and the lower the cost of living in a particular area, the less things will cost. So apples from Toppenish are cheaper there than in Grays Harbor, which are cheaper than in Arizona, which are cheaper still than in Kobe, Japan, which is cheaper still than in a small town in rural Japan. (Note: so many apples get sent to bigger cities, like Tacoma or Portland, Oregon, that it might be almost as cheap there as at the source. This is called an economy of scale.

We also talk about externalities, which are the "hidden" costs of something. Generally this means pollution, because pollution is expensive for the world (global warming, lung cancer, etc.), but no one is paying for it. So you are getting that "cost" for free.

The cost of this energy is what you pay to the power company. Pollution is an externality, a hidden cost that all of society has to pay but the polluter doesn't.

Regarding total prices, there aren't any set prices for pretty much anything. It just depends on how much people demand and what kind of environment you are in. Electricity is free if you buy your own solar panel (after you pay for the initial investment), and oranges are a lot more expensive in Moses Lake than in Florida. Heating will be more expensive if your local government controls for the externality of pollution, and charges you a pollution tax; or it will be cheaper if that issue isn't regulated. So the next time you turn on the heater, think about if you would rather be chopping wood to keep warm...

Posted by Josh at November 3, 2006 02:36 PM in Social Studies.