I have two ways to get to work. I could either drive or take public transportation. A round trip drive will cost me about $4 vs $6 round trip for public transportation. Naturally, I’d drive at that price, it doesn’t make much sense to do it any other way.
But now I’ll be getting a $100 subsidy towards public transportation. That changes things a bit. If I drive every day (assuming a 20 day work month) I would pay $80 a month in commuting costs. $100 would buy me 16 days of public transportation. If I used the subsidy for 16 days and drove the remaining 4, I would only spend $16 a month in commuting costs.
See what just happened? The total cost of my commute actually went up from $80 to $112 even though my out of pocket expenses went down from $80 to $16. Someone is still paying the whole cost and that cost went up. Also keep in mind that $16 is what it “costs” me to take public transportation, but that isn’t an accurate figure for the total cost of using public transport. Subways, busses, etc. are all heavily subsidized with tax dollars. So the total cost has gone up by a lot more, but the exact figure is hidden.
Imagine if everyone did this, as a whole, we would be paying more for commuting than we need to. Whenever someone else pays for our stuff, consuming more and more expensive services is the logical thing to do. The key is that the extra costs do get paid for, they are just hidden in things like taxes, diminished wages, or increased premiums. If you want to keep expenses low as a whole, it is important for the consumer to bear the brunt of the costs.
This is a general concept that has all sorts of applications. Thank goodness straight subsidies aren’t all that common in our day to day life. Splitting bills evenly, health insurance, and even cash for clunkers all share some similarities with the subsidy model. When we craft policies, we need to watch out for things that make it rational to consume more and with more expense. We all end up paying when we screw that up.