Always Think Past Stage One: Everything has Costs!

Today’s lesson in economics: Everything has costs and costs affect prices!

Noble intentions always begin somewhere in the political sphere. At face value, they sound great. Who wouldn’t support feeding the homeless? Every noble endeavor, however, does not come cost-free and we must consider those costs to fully understand the issue.

In this meme, Occupy Democrats congratulates France for imposing a law that forces food retailers to dispose of their unused food to homeless shelters. Sounds great, right? Not so fast.

First of all, food retailers do not necessarily WANT to dispose of unused food. They use various processes to reduce waste, which is a loss for them. In fact, as technology evolves, we create solutions to reduce such waste – i.e. refrigerated trucks and vacuum packaging. Every ounce of food waste equates to lost sales and profit. Even when they do have to throw out food, they don’t do it cost free.

For example, let’s say it costs $0.10 to throw out one pound of beef. When creating prices, grocers factor in a loss percentage (as does any business with any waste) as well as the cost to dispose of the food (services, materials, etc.). In other words, when you bought something else in the store, a portion of that price (the cost side) includes both lost-sales recovery AND the cost to dispose of the beef.

These are not costs that disappear simply because the beef was not sold. Grocers do everything they can to reduce these losses, but they will still recoup them somehow. For example, grocers may sell old corn to farms to use as feed, thus reducing their costs and overall waste.

Now let’s go one step further. Just as there is a cost to dispose of the food (our hypothetical $0.10), there is a cost to transport it to a homeless shelter. The latter is obviously greater otherwise they wouldn’t just toss out food. The grocer will need additional labor to package the food, processes in place to comply with the law, and provide transport (just to name a few). Until an alternative method becomes more cost effective, grocers will continue to utilize the current method.

Let’s be clear, ALL of these things have associated costs and ALL of those costs will be passed down to consumers. Grocers will not altruistically absorb these costs. No, they will pass it on to consumers or pursue other cost-reduction options (i.e. cut their labor force). Once costs increase, firms do not want to increase prices because they know consumers will not be happy. For example, even a slight price increase will harm low income consumers. For a family living on a tight budget, an increase in their grocery bill can be devastating.

Although this law has admirable intentions, it fails to address to root cause of homelessness as well as impose costs on people who probably can’t afford it.

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