Monday, August 3, 2009

Was it worth it? Yes. Was it free? No.

This week is "Free Week" on This Young Economist. That is, every post this week pertains to the notion of "free." If you haven't caught it, I'm giving away a free lunch for this week's poll. Vote on the poll and sign up for your chance at a free lunch. [link here: if you want to enter, there's a form] If anything else, it will be fun. And yes, I really am giving away $5 (I'll put everyone's entries into a numbered list, and then use Random.org's True Random Number Generator to select the winner). Now, onto today's post.

The free lunch concept dates back to the mid-19th century when saloons used them as a marketing gimmick:

Free lunches, often cold food but sometimes quite elaborate affairs, were provided for anyone who bought drink. This inducement wasn't popular with the temperance lobby and was also criticized for the same reason that others in the 20th century later introduced the TANSTAAFL idea to economic thinking, i.e. saloon customers always ended up paying for the food in the price of the drinks they were obliged to consume. Indeed, some saloon keepers were prosecuted for false advertising of free lunch as customers couldn't partake of it without first paying money to the saloon.

Indeed, even the original free lunches were not actually free. Patrons paid for the lunch through having some drinks at the saloon. That's one big reason that economists like to say that "there ain't no such thing as a free lunch." And, it's reason number one (of two) I like to give for why lunches ain't free:

1. With many zero marginal price schemes, there is often a catch. Take a personal example. When my wife and I went to Las Vegas, we were approached by a 6 ft 2 inch, 300-pound man in a bright red pin-striped suit. He had red shiny leather shoes to match. He offered us a free lunch, a gondola ride and a trip to the wax museum... if only he could talk to us about purchasing a timeshare condo. No obligation to buy.

Two hours later, after saying no 80 times, we got our coupons for lunch, the gondola ride, and the wax museum. We felt like paid for it.

2. Our time can always be put to a different use. And, that use has value. The idea is that we live in a world of tradeoffs. We simply do not have enough time to do all of the things we want to do in life. Therefore, everything we do has a cost. That cost is the value of the next best alternative. That's because if I don't partake in one activity, there's always my second best activity (and therein lies the opportunity cost).

Back to the Vegas gondola ride example. If we hadn't spent two hours listening to Mr. Red's sales pitch, we would have found something else to do. What's the value of that next best option? Given my inclination for playing blackjack and exploring strange places, the value we placed on that time was definitely not zero.

Nevertheless, we probably walked away from that sales table with more stories than if we played blackjack for two hours. And, the next time I see someone wearing a red pin-striped suit, I'll think of Vegas. That memory has to be worth something.

So, how did I feel about our "free lunch"? Was it worth it? Yes. Was it free? No.

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