The Hidden Cost of Free Services, Who Really Pays?

A lot of services have been provided at zero cost to the consumer. For example, many articles on the internet are free. A lot of people provide free consultations and free estimates for services. Charities provide things for free. People who claim that our societies would be better off if we had free services from the government, like healthcare, welfare and education. Either way, everyone wants free things, even when nothing is truly free. This article will explain how, exactly, that no “free” products or services are truly “free”, and in some cases, causes further downstream costs on society, especially in the case of the government.

About the government providing “free services”

We know that it takes money to provide things of value to people. In the case of the government, it takes from productive citizens - those who generate revenue from their skills or assets, to fund these programs. In some cases, the government imposes a greater cost on society by doing so. It is hard to keep providing value to society through your labor if the government takes most of the fruits of your labor. Capital is also more mobile, the more you attempt to seize from the rich, the harder it is to get the capital to fund the government. Money goes where it is treated best, and grasping at the rich’s assets is like trying to hold water in your bare hands. So harsh taxation - with no loopholes just crushes the economy and results in fiscal dominance1, increasing inflation while decreasing the economic base. In fact, free services from the government impose higher costs on people than services provided under other means.

A fundamental economic question is - who is paying, especially if the government doesn’t provide these services? 

In the case of consensual free exchange, there are two sources: profit seeking sources and non-profits. Both of these require someone to pay, and for exchange to happen in some sort of fashion.

Let’s start with non profits. Non profit organizations have variable sources of funding. Candid, a research organization focused on nonprofits, estimates that 30% of nonprofits rely on government funding2. The ones that don’t rely on the government are reliant on private individuals or corporations. Either way, the charities are beholden to whoever provides the funding, and the private individuals who fund charities are often using it to boost their reputations, elevate their profile, and ensure that they receive some amount of rewards for their public donations. Maybe it will help them gain influence in social circles, or generate goodwill so that politicians are more likely to pass their policies. Either way there can be a sort of market created for goodwill (not accounting goodwill), that represents favors that can be called in, or intangible benefits caused by private actors.

What about free things in the case of for profit organizations providing free services?

In the case of for-profit activities, the motivation can be easily shown - profit. Profit could be in many forms: avoiding regulatory scrutiny, increasing the bottom line, increasing goodwill, or even something more simple - using advertising to make the services free, but allowing them to profit through looking at content. Either way, someone pays. And if it isn’t you, you are likely the product. Someone always pays.

Nothing is truly free. Even open source projects require effort to implement and customize, something that would cost a person hours in time, hours that they could’ve avoided if they went to a paid software solution. Economics dictates that someone must bear a cost for anything worth having. And it is self-evident that the more utility one thing brings, the more it costs. Doing anything requires productive effort, and imposes a cost.

So whenever you hear someone suggest something should be free, it is fair to assume that someone must pay. The fact is, the person suggesting it doesn’t want it to be him or her to pick up the tab for any costs. When people don’t appreciate how much things cost, it causes them to devalue things they consider essential, which creates a perverse effect that raises the costs of essentials for everyone. 

Why is this important?

So what does it mean to you, the business owner? You have to have a deep understanding of cost control and revenue maximization. You need to understand where your inputs are coming from, what you truly rely on. Do you rely on free services that might eventually be charged to you? Are you doing free services or donating things that can cause further revenue down the line, or are your services a black hole? You need to fully understand what you are relying on and who you serve, and focus on what reduces costs and enhances revenue.

Sources:

1. https://taxproject.org/fiscal-dominance/

2. https://candid.org/blogs/how-many-nonprofits-rely-on-government-grants-data/

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