Thursday, 23 November 2017

There's No Such Thing As A Free Lunch - Or Is There?

An idea that's absolutely central to economics is the idea that 'There is no such thing as a free lunch'. One of the aims of this maxim is to warn overly-idealist people that when something is offered for free, it almost always means that someone else has to pick up the cost. A good example is the foolishness behind some people's wish for there to be 'free' university education - they seem wilfully oblivious to the fact that the cost of a 'free' education must be picked up somewhere.

Strictly speaking, judging by the letter, the long-standing 'There is no such thing as a free lunch' maxim applies broadly throughout economics. Even on those rare occasions when you can acquire something that's totally free to you and of no cost to the provider, there is almost always an opportunity cost somewhere, even if it's simply something else you didn't do whilst enjoying your freebie.

While all that's true, it is possible to identify something in the economy that could aptly be classified as a free lunch - it occurs every time there is consumer surplus and producer surplus - that is, when there is a personal gain beyond the cost of something. When you would buy a cinema ticket for a cost of £10 but the gross benefit to you is £15 worth of pleasure, the £5 of consumer surplus is the free lunch in the equation* (the same applies the other way round with the provider's producer surplus).

(*If you want to quibble, the opportunity cost of not enjoying alternative consumer surpluses instead of the cinema trip's consumer surplus can be factored into the equation, but there's no real need to do so, particularly if one makes the assumption that usually activities with the most consumer surplus are the ones we'd most frequently choose anyway).

The economic growth and increased prosperity we enjoy in society is made up of billions of these free lunches. They are where value is created, and all of those consumer surpluses and producer surpluses from which we benefit - they are the things in the economy that could pass a free lunches.