The Cost of Everything

Everything has a cost.  There is no such thing as “free.”  Any economist worth his salt knows this, but it is a fact generally lost on the population at large.  That is because when most people think “cost,” they think money.  Money is a cost, of course, but it is just part of it.  The other part of total costs are opportunity costs.

Opportunity cost is nothing more than the cost of taking an opportunity; that is, what you have to give up in order to undertake your opportunity.  These costs can be monetary but can also mean lost opportunities in and of themselves.  Let’s look at some simple examples:

  • You and your spouse decide to go to a restaurant for lunch.  You try a new place rather than your favorite place.  The cost of that meal was the monetary price, as well as the lost favorite meal at your other place.
  • You decide to study art at the university.  The cost of such a degree is the tuition and fees, plus the lost income that you could have made pursuing other degrees.
  • You decide to root for a football team other than the New England Patriots.  Your cost is the money you spend on team gear, plus the lost time wondering whether or not your team will make the playoffs this year (Patriots fans don’t have that cost).

The thing about opportunity cost is that it is unseen, and therefore often discounted or ignored in popular discussions.  It is also highly subjective.  Whereas monetary costs are quite stable (a $10 meal is $10 to just about everyone), non-monetary costs can differ from person to person (the arts degree makes a person happier than they would be working in another industry).

Why do I bring this up now?  On the campaign trail, there are often calls for “free” or “low cost” stuff: free housing, free college, free health care, free tax refunds, etc etc etc.  But it is important to remember these things have costs far beyond their monetary ones.  And these costs are rarely discussed and barely acknowledged.

Let’s take medical care: in the US, we spend more on health care than just about every industrialized nation.  That shouldn’t be a surprise to anyone (by the way, I am discussing total spending.  If you strip out cosmetics, like plastic surgery and the like, the figures change, but that’s a discussion for another time).  We could change that easily by adopting universal health care, like so many other nations.  That would reduce the nominal (monetary) cost of health care.  But it would also raise costs in other ways: longer wait times , Fewer doctors, higher taxes, lower quality of care, etc.

Keeping opportunity costs in mind is what separates the good economist from the poor economist, the good thinker from the poor thinker.  It’s easy to reduce monetary prices on things, but reality isn’t optional: there ain’t no such thing as a free lunch.

3 thoughts on “The Cost of Everything

  1. You decide to root for a football team other than the New England Patriots.

    You must be joking.

    OK, you mean hypothetically, right?

    Jon, Please correct me if I’m wrong, but isn’t it double counting to add the monetary cost to the opportunity cost? After all, the money is just a medium of exchange. If I value my favorite lunch at $10, (OK, more than $10) the cost of trying a new place is My Favorite Lunch, not My Favorite Lunch plus $10. The $10 is spent in either case.

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    • The New England Patriots thing was a not-to-subtle jab at the rest of the NFL. You’ll allow me some homerism 🙂

      Regarding double counting, it’s not.

      Accounting profit = monetary benefit – monetary cost

      Economic profit = total benefits (opportunity benefits + monetary benefits) – total cost (opportunity costs + monetary cost).

      So, what I am saying is “the formula isn’t P = R – C. It’s P = (R + OR) – (C + OC).” Just adding in additional variables.

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      • OK, gotcha. Thanks Jon. I wasn’t considering that monetary costs and benefits might be different amounts.

        When you suggested I might decide to root for some team other than the Patriots, I wondered: “My God, why would anyone consider doing such a thing?” 🙂

        They’re my favorite also, even though I don’t live in New England, and even though I’m not a serious football fan.

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