Differences Between Free and Five Cents

There’s a big difference between free of charge and any charge, no matter how small. That’s on observation often made about e-business. When it comes to the web, part of the difference arises from difficulties with micropayments. Another part arises from the way we think about costs; this part applies to even to the most tangible and familiar of objects.

Consider, for example, the plastic or paper bags given away by many stores, including supermarkets. They are no longer given away for free in Montgomery County, Maryland, where I live.

Montgomery County passed legislation… that places a five-cent charge on each paper or plastic carryout bag provided by retail establishments in the County to customers…

Montgomery County’s legislation, similar to Washington DC’s Bag Law, is designed to create an incentive for the public to reduce use of disposable bags by bringing reusable bags.

Will it work? I have evidence that it does. And by evidence, I mean anecdote: stories of my own behavior, and conversations at cash registers. I have gone back into the house to get shopping bags as I am about to drive to the store, then remembered that I’ll be charged if I get new bags. I am trying to keep a stock of bags in the car for the inevitable occasions on which I forget to grab bags from the house.

This effect isn’t due to the size of the difference: the five-cent difference between free and a nickel is bigger than five cents. Moreover, the directions of the five-cent difference matters. The local Giant supermarkets used to give five cents back for every bag a customer brought in. But the gain of five cents per bag wasn’t enough to make me bring bags to the store.

So there are two five-cent differences involved here. The loss of five cents per bag used affects my behavior, while a gain of five cents per bag rarely did. Those familiar with the concept of loss aversion shouldn’t be surprised. That said, I’ve been familiar with the concept for years, and I am surprised at how effective the five-cent penalty seems to be.