TANSTAAFL. There Ain’t No Such Thing as a Free Lunch. Someone pays, somehow. The standard textbook example is pilots who refill their plane at a gas station that offers them a “free” steak dinner while charging five cents a gallon more than another station at the same airport. The pilot and co-pilot get dinners for free, the gas station gets an “extra” 0 for the gas sold, and everyone is happy. I believe this story is better at explaining the Money Multiplier effect than cui bono-ing the transaction. The restaurant might not exist without the cross-subsidy. The pilots spend their “spare” cash on other things. The owners of the gas station and restaurant have a more positive cash flow than they would have otherwise and therefore pay
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Ken Houghton considers the following as important: are there free lunches, Featured Stories, Hot Topics, US EConomics
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TANSTAAFL. There Ain’t No Such Thing as a Free Lunch. Someone pays, somehow. The standard textbook example is pilots who refill their plane at a gas station that offers them a “free” steak dinner while charging five cents a gallon more than another station at the same airport. The pilot and co-pilot get $50 dinners for free, the gas station gets an “extra” $150 for the gas sold, and everyone is happy.
I believe this story is better at explaining the Money Multiplier effect than cui bono-ing the transaction. The restaurant might not exist without the cross-subsidy. The pilots spend their “spare” cash on other things. The owners of the gas station and restaurant have a more positive cash flow than they would have otherwise and therefore pay better and/or invest more. That’s a much more relatable story than “the pilots just cost each passenger on their 300-person plane an extra 50 cents per ticket.”
When economists talk about the impossibility of a free lunch, they’re generally starting from “even without transaction costs, there are Search Costs (i.e., addition effort required).” The cheaper gas station costs you in driving distance and longer lines. (This does not apply to airplanes.)
The Exception to Prove the Rule?
But there is one area where, apparently, the Lunch is Free. Rajnish Mehra and the late Ned Prescott published The Equity Premium: A Puzzle in 1985, discovering a possible “free lunch”–a risk-adjusted excess return provided by the Equity Capital Markets over U.S. Treasuries. (Treasuries are risk-free by definition, if you assume the Government uses its ability to tax to pay its debt.) To quote the first line of the Abstract:
Restrictions that a class of general equilibrium models place upon the average returns of equity and Treasury bills are found to be strongly violated by the U.S. data in the 1889-1978 period
What a nice present. One should never look a gift horse in the mouth, since you may find a Trojan there.
Next post: just a quick glance…for Lucas’s sake, if nothing else.