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Walter Williams
Walter E. Williams
10 Feb 2016
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Price Versus Cost


Suppose you buy a gallon of gas for $3. How much did it cost you? You say, "Williams, that's a silly question. It cost $3." That's where you're mistaken, because there's a difference between price and cost. To prove that price and cost are not the same, consider the following. Suppose you live and work in New York City and routinely pay $15 for a haircut. Imagine you were told that there's a barber in Boise, Idaho, who can give you the identical haircut for just $5. Would you start going to the Boise barber? I'm betting you'd answer no because even though the price is cheaper, the cost is greater.

We might think of price as the money that's actually given in exchange for the transfer of ownership. When you purchased the gallon of gas, you simply transferred your ownership of $3. What the gas cost you is a different matter. One way to determine the cost of a gallon of gas is to ask yourself what sacrifice you had to make in order to have $3 to buy it. Say that your annual salary is $75,000. Your total federal income tax, state income tax, local taxes and Social Security and Medicare taxes come to about 35 percent of your salary. That means that in order to purchase the $3 gallon of gas required that you earned about $4.60 in order to have $3 after taxes. That means a gallon of gas costs you $4.60 worth of sacrifice. But that's not so costly as it is to a richer person — for example, someone earning a yearly salary of $500,000. He has to earn more than $5 before taxes in order to have $3 after taxes to purchase gas.

If taxes only concealed hidden costs of what we buy, we'd be lucky, but taxes are destructive in another hidden way. Suppose I want to hire you to repair my computer. Having the work done is worth $200 to me, and performing the work is worth $200 to you.

The transaction occurs because we have a meeting of the minds. Suppose Congress imposes a 30 percent income tax on you. That means that if you repaired my computer, you would receive not $200, what it was worth to you to do the job, but instead $140 after taxes. You might say the heck with repairing my computer; spending time with your family is worth more than $140.

You might then offer that you'd do the job if I paid you $283. That way, your after-tax earnings would be $200 — what doing the job is worth to you. There's a problem. The repair job was worth $200 to me, not $283. So it's my turn to say the heck with it.

This simple example demonstrates that one effect of taxes is that of destroying transactions and hence jobs. But politicians have what economists call a zero-elasticity vision of the world. In other words, they're fool enough to believe that people will behave after taxes are levied just as they behaved before and that the only effect of a tax is to bring in more revenue. Of course, a more flattering assessment is that politicians are not fools and know that their actions destroy transactions and hence jobs but they don't give a damn and only care about revenue.

Here's a question: Would you and I, as well as our nation, be better off if you repaired my computer and I gave you $200 in cash and we agreed not to report the transaction to the agents of Congress? I'd answer yes and no. Yes, because there'd be more transactions, more jobs and greater wealth. No, because we'd be criminals.

Taxes are necessary to fund the constitutionally mandated functions of the federal government. If Congress spent according to its authority under Article 1, Section 8 of our Constitution, taxes wouldn't be any more than 5 percent of the gross domestic product, as it was between 1787 and 1920, as opposed to today's 20 percent.

Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at



11 Comments | Post Comment
Being a frequent reader of Mr. Williams is like having a free econ 101 class. This is so basic, yet people do not understand it. If we could educate the people on the basics of money, perhaps we could create some real change in Washington by voting people out that don't understand economics.
Comment: #1
Posted by: Chris McCoy
Mon Apr 15, 2013 9:21 AM
Re: Chris McCoy;... Sir,... Money is not morality; but if the man wants to grasp the price of things let him do so in a fair and open fashion... He should know as well as anyone that the society in which stuff happens is not free... As a practical matter; what it costs is what it costs.... The deals people make as individuals is simply a fraction of the cost... While it may be that at certain times you want the society to pay for the profits of a few, in order to build up industry or improve specific or general conditions that is an interest of the government and ultimately of the people, this is not always the case... Consider that, to use his example of Gasoline that to have it we are doing inestimable harm to our international standing, bringing on war that we can little afford, and seeing our wealth transported out of our society, but little helping the societies where it roosts...
Consider the cost to society that is never reflected in the price of a gallon of gasoline... We pay a fraction of the price, and the environment takes the hit... There is a chronic effect that people grow used to, but suffer none the less in health problems... Everyday as a result of the internal combustion engine, as much oil is spilled on our roads as was lost in the Exxon Valdise spill... Every gallon of oil is enough to pollute, that is, make unusable, one million gallons of water... Well, the Great Lakes may have the Asian Carp, has mussels foreign to our lakes, has sewage by the millions of tons every year, has algae plums that choke out all life; so what is a little bit more oil... The sport fish cannot breed, but perhaps the carp can... They are used to pollution as their price of survival in Asia... It is a matter of money, and where money is your morality -you can kiss your rights, your society, and your life good bye...
Do you dare stand in the way of profit??? Stand up against this wall if you wish to stand against the privilage of property... People have a right to stand against taxes used for an immoral purpose... They do not have any just objection to taxes used to support the common wealth...
Taxes were never supposed to be on labor, but where always supposed to be on the commonwealth let into private hands... Let me give you an example of how that worked... People bought the upper pennisula of Michigan to clear cut it... With it cut clear, they refused taxes, and the state took it back wrecked... Now that it is regrown, the rich people want it back to waste again, and the republicans in government say: Sure!
These people have no decency, and no natural limits to their greed... All we can do is tax them, and regulate them, and to date we have done little of either...They will not support their society out of the goodness of their hearts... Their hearts are as rotten as shet...They may wave the american flag in your face to make you squat on command, but their money has no nationality, no patriotism... I runs where profits are the highest , and that is always were people are the poorest...
Comment: #2
Posted by: James A, Sweeney
Mon Apr 15, 2013 10:16 AM
Ah, yes. It would be so much more simple if financial transactions took place without taxes, because government provides no useful purpose. Just look at Somalia! The government lacks the power to collect taxes and as a result the place is a paradise on earth.
Comment: #3
Posted by: Geoffrey James
Tue Apr 16, 2013 3:58 AM
Just once I would like to read your article before Mr. Sweeney.
Comment: #4
Posted by: mark wells
Wed Apr 17, 2013 3:00 AM
Re: Geoffrey James
Your attempt to reduce Prof. Williams' argument to an absurdity is itself absurd. It is only your own mistaken view that lets you jump to the conclusion that he is opposed to taxation. He said nothing of the sort. In fact, his final paragraph explicitly denies what you think he said. Or didn't you get that far before making your sarcastic remark?
Comment: #5
Posted by: Phillip Schearer
Wed Apr 17, 2013 3:40 AM
I don't mean to sound disrespectful but Walter Williams column always make sense to me and poor Mr. Sweeney's, on-going ramblings are so difficult to follow, much less to comprehend. I did get from Mr. Sweeney today that he is a Left-winger and an environmentalist but not much else except a headache and crossed-eyes.
Comment: #6
Posted by: Mandy
Wed Apr 17, 2013 10:38 AM
I've been explaining that concept to people for years. And, the very similar concept that a penny saved is worth more than a penny earned because of all the factors that go into earning that penny. Saving a penny goes straight to your bottom line and is pure profit.
On the tax side, although I agree that certain taxes are necessary for running the government and for the services it is supposed to provide, the federal personal income tax does not fall into that category. All, that is 100%, of all personal income taxes collected goes not to the government at all but to the private federal reserve for interest on the never to be paid off debt created by the federal reserve out of thin air (as all banks do) and loaned to the government with interest. (sources: Congressional Research Service, Grace Commission). That tax is true destruction on the economy at the expense of the majority for the benefit of a favored few; i.e., the Federal Reserve and its shareholders.
Comment: #7
Posted by: David H
Wed Apr 17, 2013 12:34 PM
Mandy you are right on the money. Its best to just ignore Sweeny. Anyhow, the only way you can agrue against Walters arguement is to make up stuff he dosen't say, then argue against that. He in no way said that we shoulden't have taxes. You have to understand that most of the taxes collected goes towards the military and corperate welfare. Your tax dollars are just making the rich even richer. If you want to decrease the wealth gap, you should let people keep as much of what they earn as possible.
Comment: #8
Posted by: Chris McCoy
Thu Apr 18, 2013 6:24 AM
I often wonder why, if Mr Sweeney seems to disagree with EVERY SINGLE THING Dr. Williams posts, why he bothers to spend so much time responding to it each and every week....
Comment: #9
Posted by: Ric Crouch
Fri Apr 19, 2013 10:29 AM
Sweeney is a troll. Not necessarily “for” anyone but definitely against conservatives and free market policies. He has no credible ideas of his own, he's just against others, wants them to feel inferior and tries to intimidate them into silence. Ignoring him isn't “silence” it is denying him a platform.
Comment: #10
Posted by: Ed Boyle
Mon Apr 22, 2013 5:53 AM
Sweeney's a nut.
Comment: #11
Posted by: Tom
Mon Apr 22, 2013 7:00 AM
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