Saturday, March 26, 2011

Can you afford the gift? When free costs too much.

Could you afford this Jet if it was free? Maybe not.

Sometimes, getting something for free is too expensive because of other costs that go along with it.
Imagine you've just won a $5 Million* private jet. It's yours, complete with a crew that will take you wherever you want to go on a moment's notice. Pretty sweet deal.
And by the way, it costs $1800/hour* to fly it, plus a bunch more in maintenance and storage fees whether you use it or not.
Free jet or not, you're not going to get much use out of it without a plan to pay for it. Because operating the Jet like we operate our cars is far beyond what most people can afford.
Let's try something a little closer to home. How about a free cellphone? Ah, now your defences are up. You already know that 'free cellphone' means a moderately extortive three year service contract with a phone that's going to be out of date in a year.
What we're dealing with here is the fundamental difference between capital budgets and operations & maintenance.
Every school built has a certain capital cost. You pay that once, and then you have to pay to operate it more or less in perpetuity, at least until you close the school. That means staff, heat, utilities, and maintenance. All non-free.
Same with infrastructure improvements, or free pets for that matter; even if someone else pays for them, you're stuck with maintaining the road or feeding the cat.
For any purchase you're considering, consider the money, the time, and the opportunity cost to operate and maintain it. If you can't afford that, then even if it's free you can't afford it.
If you expand this to civic infrastructure, minimizing the amount of capital (like roads, buildings and machinery) that needs to be operated and maintained makes good financial sense.
Maybe that sprawling development isn't the highest and best use of that parcel of land. Add some layers of usage and get more use out of that infrastructure. There's your tax cut. More people using the same stuff divides the o&m cost between more people, which for all intents makes it cheaper for everyone concerned.
Just because it's free doesn't necessarily make it a good idea.
*Costs not necessarily indicative of the jet in the picture. (I don't think it's actually for sale yet.)
You might also like:

No comments:

Post a Comment