Sunday 24 March 2013

True price of free benefits

Next generation will have to pay bill for anything that's given away now
By Jeremy Au Yong, The Straits Times, 23 Mar 2013

THIS month, we were all given a live demonstration of the difference between free and merely cheap - with the whole thing played out over meatballs and McMuffins.

It started on March 7, when furniture retailer Ikea announced the return of its Swedish meatballs after the horse meat scare by selling them at a heavily discounted price of 10 cents each.

Then on Monday, McDonald's went one better and gave away free Egg McMuffins as part of what it called "National Breakfast Day".

Both promotions predictably drew large crowds and typical kiasu behaviour, but it was clear that the crowd hankering for free burgers were a more motivated bunch. Lines built up right from the start of the giveaway at 5am, with some reportedly pulling all-nighters to make sure they were up in time to snag a free burger. At least one person zipped from outlet to outlet to try to get as many free ones as he could.

The craze at Ikea was relatively - only relatively - more subdued. The lines did not build up until a far more reasonable time of 11am, 11/2 hours after Ikea opened.

The two promotions showed not just the tremendous appetite Singaporeans have for a good deal but also how powerful the lure of "free" can be.

It also served to reinforce the argument that underpins the Government's long-held reluctance to give things away for free - that free things encourage over-consumption.

The special effect of the price of "zero" is well known. In a much-referenced 2007 paper titled "Zero as a Special Price", academics from Massachusetts Institute of Technology, the University of Toronto and Duke University showed that zero pricing doesn't just lower costs, it actually leads the consumer to perceive the benefits as larger.

They conducted several experiments, one of them involving selling Lindt truffles and Hershey's Kisses for 27 cents and two cents respectively. They then discount both by one cent over two rounds until the prices are 25 cents and free. Demand did not change even when Hershey's were sold for one cent but it shot up dramatically when the Kisses became free.

The researchers argue that a price of zero produces an emotional reaction from people that affects the way they normally conduct cost-benefit analysis. The price difference between the two chocolates never changed, but the way people reacted to them did when one became free.

This might explain why so many were willing to lose sleep for a free burger that would usually cost $2, and why the Government will always be fearful about treading into the realm of "free".

Yet between the cheap meatballs and free burgers, the Government did seem to step away from its aversion to "free".

Pasir Ris-Punggol GRC MP Janil Puthucheary was at the forefront of the charge, making a speech during the Budget debate that urged the Government to consider using "free" as a policy tool. His suggestion was to set aside certain periods of time for free travel on public transport as a means of easing peak-hour congestion.

Transport Minister Lui Tuck Yew did not dismiss it out of hand but he did not embrace it either, saying his ministry would need to carefully consider the plan.

Later in the debate, "free" came up again, this time with Acting Minister for Culture, Community and Youth Lawrence Wong announcing that all Singaporeans and permanent residents would be given free entry to museums from May. He said the move was to make those institutions - currently not well patronised - more accessible to the masses.

And while the foray of "free" has been limited in scope thus far, it does raise the question of whether there is room for it to play a bigger role in Singapore policy.

The answer is likely to be a qualified "yes".

Qualified, because there needs to be a line drawn above the types of things the Government would not be prepared to give for free.

Dr Puthucheary suggested this be done based on outcomes. He said that he was against free health care because studies have shown that it did not raise the quality of life and simply raised state spending.

I suspect the line will be drawn based on needs. That is, the Government might always be reluctant to give away those things that Singaporeans truly need.

That might seem like rich irony to some, but for the Government to give away something like health care or education is to cross a line between incentivising desirable behaviour and welfare.

One key difference between the two is the permanence of welfare. You can take away incentives and perks, but it is nearly always politically impossible to withdraw welfare.

If people get used to something like free health care, it would take a brave political party to try to introduce a charge.

There was no danger of welfarism when it came to giving free access to museums. Attendance at museums here has generally been lacklustre and overconsumption on exhibits about Singapore's history is not a terrible thing to have. Yet, no one really needs a museum visit like they do a doctor's visit.

In that sense, the prospects for free transport during the shoulder periods of peak hour look good. Travel during a small window can hardly be considered a necessity and such a change is unlikely to create any sort of dependency.

If it does not result in the sort of behavioural change sought, the scheme can be taken away with minimal public uproar.

That ministers believe they need to carefully consider this change could indicate a need to signal continued resistance to any sort of institutionalised freebies.

A team of leaders so conscious about slippery slopes might see this as yet another one.

Give away free rides on the train or free entry to museums, and it does not take too much a stretch of the imagination to see someone totting up the cost of those and then asking for something else free in that price range. As it is, some politicians have suggested free travel for senior citizens.

One way or another, it is almost inevitable that there will be more and more people putting pressure on the Government to start giving more away for free, all of it backed by good intentions and legitimate need.

At the heart of the problem is the fact that "free" does not mean the bill disappears. Anything we give away free to one generation will have to be invoiced to the next in some way, be it higher taxes or cutbacks in some other area.

There will be cases where such a move is justified, but there will be other cases where the provision of free benefits means spending limited resources on people who do not need them.

With the multiple warnings of how an ageing population will mean an even larger strain on the young, we need to be very careful about not loading our already large future social spending bill with unremovable freebies.

Even as we move to become a more inclusive society, we need to keep in mind that things which come for free can still incur a heavy price.

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