Tuesday, February 21, 2006

Your Child is Worth Every Penny



The first chapter of almost every economics textbook assumes that humans are rational beings. Every decision that a person makes in his or her life goes through a rigorous cost-benefit analysis that might take seconds, days, weeks, or months to make. The conclusion is simple and elegant: if the benefits outweigh the costs then do it, but if the costs outweigh the benefits then do not do it.

However, does cost-benefit analysis apply to one of life's most important decisions: whether or not to have and raise a child? MP Dunleavey, a columnist for MSN money, wrote an article about the costs and benefits of having and raising a child. The financial costs of having and raising a child are staggering. A family could spend $269,000 to raise a child from birth to 17. Not included in the cost estimates are the cost of college tuition, the opportunity cost of a career break, health and lifestyle cost of pregnancy, costs of prenatal care, the cost of stress, and the many sleepless nights of caring for a child.

Despite these costs, people still have kids. This leads an economist to believe that, for the most part, the benefits of having and raising kids outweigh the costs. However, Dunleavey goes on to argue that the net benefits of having and raising a kid are, at most, ambiguous. There are emotional and psychological benefits (i.e. fulfillment and familial bond) to a child, but these benefits also carry emotional, psychological, and financial costs of their own. Dunleavey concludes that "whoever suggested that we humans are economic creatures was dead wrong."

It appears easy to write off 200 years of economic thought with statistics and numbers on costs and benefits. However, even Dunleavey admits that "when I plug those lines into my mental spreadsheet next to the under funded retirement account and the skyrocketing cost of college, that little voice trumps them all." Hence, having a child does satisfy the cost-benefit analysis criteria because most of the benefits of a child are intangible and can only be measured through the love of the human heart and not dollars.

1. What are some other decisions where most of the benefits are intangible?

2. If a benefit is intangible, then is it still appropriate to use cost-benefit analysis?

3. Are people rational? Why or why not?

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