Making analogies between a household and other sectors of the economy can be dangerous, so let me give the standard “don’t try this at home, kids” warning. I was talking to a reporter from Syracuse yesterday and trying to come up with the right analogy to explain why a business might engage in management-by-accounting that is perfectly benign for its own purposes, but that may confuse an outside who think the accounting represents economic reality.
The example I gave him was if your family has a swear jar, where ever member of the family has to put some coins into the jar if they swear at the dinner table. I explained that to the kid with a small allowance, the “cost” of putting money into the jar was high — every swear might equate to a lost candy bar. The goal is to manage the child’s behavior by imposing a cost on activity you want to disincent. But then I asked whether the family as a whole is better or worse off if the money is in the jar or int he kid’s pocket, the answer is either that the family is in the identical position, or arguably the family is actually better off because the money has been transferred from a kid inclined to spend his money foolishly to the jar, where perhaps it will get saved up for a wiser parental purchase.
In this example, the child is the athletic department and the jar is the university as a whole. But it fails as an analogy because swearing is an unnecessary bad behavior the parent is trying to stop 100%.
So as a second analogy, let’s think about a family trying to teach their teenager about the value of money and of hard work. It’s a family with two economists for parents so admittedly, they are a little weird, and they decide for the summer to put a price on every service they provide to the teenager. They charge rent, they charge for food in the fridge, they charge for the service of cooking the food, etc. They make him pay a sort of tuition charge for the privilege of attending the nice public school in the good school district they moved into. They also pay for chores, and the teen has a decent job that brings in money too.
From the perspective of the kid, the food costs whatever his/her parents charge for it. They may be going to Costco and buying ramen in bulk for 10 cents a pack, and then charging $1. Housing costs whatever it costs — to the parents, the room would just go empty if the teen moved out (or maybe one of them would set up a drum kit in the room and rekindle a passion for percussion) and so there is no real cost to them of giving the teen space in the host, but to the teen, the $100/mo rent is a huge, looming cost.
In reality, the real costs are what the parents are shelling out and the real revenue is what the teen is bringing in from his job. The allowance they give him for his chores is not real revenue, and the payments he makes from room, board, tuition, etc. don’t necessarily reflect the actual cost to the household of those expenditures. Figuring out what the family’s cost of that nice public school is a very hard exercise — it probably involves looking at comparable homes in lesser schools districts, amortizing the difference in cost over the years of schooling, netting out the increased resale value at the end of the schooling process, figuring out the appropriate discount rate for the time value of money. It’s a lot of work. But the short-cut of assuming the amount the parents are charging their teenager is a good proxy for the actual cost is a bad one — there need not be ANY relationship.
The parents are picking prices to manager their child’s conduct without having to run his/her life. They might make studying math come with a payment to the student because that’s conduct they want to encourage (even though it generates zero dollars to the household, at least in the short- or medium-run). They might make coming in after curfew a very expensive activity. They are “managing by accounting” in some sense — giving the teenager autonomy but then constraining that autonomy through accounting practice that imposes artificial costs on some conduct.
Anyway, this analogy, like all analogies, is imperfect. Some colleges face opportunity costs when they let in an athlete — they may be space-constrained so that adding one more football player will mean one fewer violinist can come, and perhaps violinists pay more for dorm space. But for schools where the dorm room would otherwise be empty (e.g., a school with room that is trying to expand), this might not be a bad one. And as you can see, trying to judge the profitability of the teens conduct based on the fact that he/she takes all of his summer job wages and spends some of them on real purchases (like buying gas for the car he/she also pays rent to his parents to use) and then also on activities within his family’s rules (like the rent the parents charge on the car) mixes together real costs and fake costs and distorts the picture.
Is the teenager profitable to the family? That’s an answerable question but looking at the payments imposed by the family on family members is not going to help you answer that questions. The teens outside revenue, the teen’s outside spending, the family’s true costs of providing all the services they are charging for, the forgone revenue to the family from housing the teen rather than (potentially) renting out the room — these are what you need to answer the question. The transfer payments among family members aren’t helpful, unless they are specifically engineered to mimic the true cost. And that’s a difficult process you don’t just stumble into by putting down the list price of a product if the list price is not the real cost to the family.