Is the knock sensor really needed the car runs fine except for the service engine light stays on?

It really depends upon the car. But the basic function is this: What the knock sensor does is if there is a knock being created by the engine, the knock sensor picks it up, and sends a signal the the computer telling it that there is a knock. The computer then calculates what to do in means of how much fuel should go in or how much air should go in. The right amount of both will get rid of the knock, and the computer will then keep the settings made the same. Without a knock sensor, the check engine light will come on, and the computer won't be able to make the engine function properly. Therefore slowly ruining the engine. Yes, they are expensive, but they are worth it, in the long run.