The big cost of small costs

economics ▪ development ▪

Dewi Susanti, a good friend, is an architect, lecturer, and a student of public-space use -- but I don't think she'd ever think of herself as an amateur economist. The following quote, however, suggests that, in her unguarded moments, she might be thinking like one (though she would probably vehemently deny it). In this blog entry, she was talking about the costs from random blocks on Jakarta's roads...:

If the last shortcut I take now is closed off, it means that I would have to take more than 3 kilometer detour to travel the same distance. That detour would have added a total of 6 kilometer to my original round-trip route, additional cost for gas at around Rp.2.700,-, and additional 15-20 minutes every day. This is equal to 30 kilometer, Rp. 13.500,-, and 75-100 minutes every week. 120 kilometer, Rp.54.000,-, and 300-400 minutes every month.

This personal cost captures the big loss of Jakarta’s population in general. The Study on Integrated Transportation Master Plan (SITRAMP) funded by Japan International Cooperation Agency (JICA) estimated Jakarta’s traffic congestion caused the region to suffer annual economic loss in the amount of Rp.3,000 billion (US$ 315.7 million) for vehicle operating costs and Rp.2,500 billion (US$ 263.1 million) for travel time.

I think this big cost of small costs can also explain why there is often a gap between a person's comparative perspective of living standard in (the capital of) a poor country vis-a-vis the poor country's income. He or she may feel that his/her quality of life is only marginally worse than those living in the capitals of developed countries -- a little bit less reliable utility services, a little bit more traffic jam and so on. However, the total, these inconveniences might add up to a significant loss to the economy reflected in the poor countries' much lower income.

By the way, if you're interested in a bit of economic theory, macroeconomists used this insight to explain the economic cost of inflation from what he called menu costs. This Wikipedia entry has a summary on it, and this is a reference to Gregory Mankiw's paper on it. (paper downloadable for those with JSTOR access only!)