Cost of Free

The Cost of Free

One of the overarching themes of modern economics is that of the cost/benefit ratio. We recognize value as being the situation where benefits exceed costs. The cost of offering something for free is not nothing, but instead it is the opportunity cost. That is, amongst all available possibilities, you should choose the one that maximizes utility. If not, the opportunity forgone is a cost, and as economists are fond of saying 'Bygones are forever bygones.' In other words, decisions after the decision point are sunk costs: You can't go back.

When you make a calculation that favors one aspect of a course of action (suppose we value volunteering our time) then presumably the intrinsic value of volunteering your time to a worthy cause is given a higher valuation than spending that same time working for profit. Beyond that, I’ll leave the argument for altruism for another forum.

The fact is that we may get something ‘free’, but it’s rarely without it’s hidden costs. You may get a desk from a friend, but the cost you incur is that you’re expected to stop by at a certain time and pick up the desk, transport it to your house, and set it up in your own house. The point is no one’s labor is free, even without the expectation of a quid pro quo. Concurrently, your time is not free. Your time is worth precisely as much as you are able to charge to the highest bidder. If you’re not able to find suitable work for yourself, then your time is still worth what you might have been able to garner if you were able to find work.

The Internet has brought tons of information available to anyone who can access it, but the cost of the wealth of information available is that it becomes less reliable. You are not able to always verify information, and falsehoods can be passed around. Search costs have definitely been improved through advent of the Internet, and through the overpowering amount of information available, the field of knowledge management has been created in an attempt to parse out the wheat from the chaff.

But the Internet has also cheapened information to the point that while there is no pecuniary cost to, say, sending a message (assuming a free connection) that the inundation of e-mail we receive gives any particular message that much less weight. For instance, snail mail is now given significantly more attention now that much of the same information could have been sent cheaper and quicker online. The price of snail mail is now a premium service that allows the sender to distinguish their message and add-on physical goods, much in the way Federal Express and Next Day Priority Mail can deliver goods, information, and physical checks.

In much the same sense, online banking has made solely electronic transfers of money de rigueur. You can save the cost of a stamp by sending a payment through your “free” checking account, and the bank is able to perform the entire transaction in a paperless fashion. This is a vast departure from the days physical checks had to be mailed or sent overnight, bringing vast efficiencies to the business sector.

One of the most tried and true tenants of economics is: 'There is no such thing as a free lunch.' The idea is that if you’re consuming something, someone paid for it. If it’s ‘on the house’, then the restaurant is forgoing revenue. If someone else picks up the tab, then there may not be an explicit quid pro quo, but someone is still paying. If you choose to divide the bill, you must factor in the social cost that someone may be offended. If someone chooses to short pay, and someone else has to cover the slack, then social costs often exceed the pecuniary costs. If you go to eat at a food kitchen, someone still volunteered their time and the food so you could enjoy that precariously 'free' meal.

The fact is, there are public goods – the park you take to walk your dog. There are also, necessarily, costs that go along with maintaining that park. If your dog up and does his duty in the public park, either you clean that up or everyone else that uses the park has to endure that cost until someone, perhaps someone on the city payroll, cleans up your mess. This is just one example of an externality. An externality is when the private benefits or costs exceed the public cost or benefits. That's just a mixed up way of saying the transaction is one-sided. Someone benefits or bears the costs of something that someone else should have paid for or reaped the rewards for. An externality is considered to be a market failure.