ARTICLE 3

 TANSTAAFL - There Ain't No Such Thing as a Free Lunch

TANSTAAFL - There ain't no such thing as a free lunch', is an economic concept. 

The concept explains, anything that is for free isn't really free, there would be some underlying direct cost and indirect cost and externalities in it.

When you receive a free gift on your birthday, the cost of the gift was paid by the gift giver, hence the direct cost was inevitable. In case, no one assumes the direct cost, the society bears the burden. How? The gift can be thrown away if it's useless and hence, results in a negative externality ie pollution to the society.

'TANSTAAFL' describes the concept of 'opportunity cost'.

Opportunity cost is the cost at which one choice is sacrificed in order to get the other alternative. In simple words, out of two choices, one has to be sacrificed in order to get the other, and the cost of the sacrificed or lost choice is the opportunity cost. In TANSTAAFL, it is believed that the alternative also produces some utility (satisfaction), yet, cannot be a free lunch.

Hidden fee

Investors need to be aware of 'free lunches' ie less risky investments that guarantee fairly high and fixed payments over a long period of time. 'Many' of these investments are burdened with hidden fees. Investments that promise a guaranteed return is not a 'free lunch' because it would also have some 'implicit cost' - any cost that has already occurred but not necessarily shown or reported as a separate expense. These investments also have the opportunity cost of not investing elsewhere.

Implicit costs, generally, have unseen risks. For example, in Michael Munger's article, 'Think Globally, Act Irrationally: Recycling', the economist describes the hidden resources used in recycling.

Recycling is the process of converting a waste material into a useful material. It's a way to simultaneously reduce the amount of waste disposed in landfills and save natural resources. But underlying this claim, for many people at least, is some murky idea that recycling ‘uses up’ fewer resources than making things from scratch. The same idea of hidden resources is applied in TANSTAAFL, as hidden costs.

Origin

The concept of 'TANSTAAFL' originated in the 19th century from a practice of an American barber shop. It offered it's customers, free lunch for a purchase of at least one soft drink. Every food was induced with high salt, which increased the need for a cooldrink, naturally. This led the customers buy more drinks as they ate more free lunches. Hence, the free lunch and the paid drink were inter connected, but seemed unrelated to the customers. The shop offset the burden of free lunches with the revenue earned from the purchase of the drinks - an unseen risk to customers. 

The proposal of a free good or service with the purchase of another good or service is an oxymoronic tactic many businesses still use to entice customers.

One similarity, different interpretations

In science, TANSTAAFL means any source (matter) is created from a resource that will be exhausted. For example, in our universe, the sun rays are emitted from the sun, which involves the exhaustion of gases. The cost of the supply of matter is the exhaustion of its resource.

In sports, TANSTAAFL was used to describe the health costs associated with being great at a sport, like "no pain, no gain".

However, the similarity in both the fields is the 'COST'.

Conclusion

There are two meanings of the expression, “There Ain’t No Such Thing as a Free Lunch.” The first, which is always true, is that there is scarcity, and scarcity necessitates tradeoffs. The second, which is almost always true, is that when someone offers you something “for free,” he expects something in return. Both are important meanings of the expression and are highly relevant to understanding economics and human behavior.

In conclusion, 'TRANSTAAFL' helps explain the risk in investments, for investors. As investors provide capital with hopes of achieving larger gains, this choice assumes the cost that growth prospects may not be achieved and the investment could be lost.

Key Words

Direct Cost: Cost incurred directly while making a product. Ex: Costs of labor and raw material used to manufacture a product

Indirect Cost: Cost incurred indirectly while making a product. Ex: Costs of rent and security for the manufacturing site.

Externality: Cost or benefit of a product that is imposed onto a third party, but wasn't included in the final cost. Ex: A factory that pollutes the environment creates a cost to society, but those costs are not priced into the final good it produces.

Trade-off: Synonym for opportunity cost. Ex: You might take a day off work to go to a concert, gaining the opportunity of seeing your favorite band, while losing a day's wages as the cost for that opportunity.

Source

INVESTOPEDIA

THE LIBRARY OF ECONOMICS AND LIBERTY

BOYCE WIRE

Written by: Amrutha Varshini