TANSTAAFL: What about “free” TV, radio and Internet content?

Another excerpt from my book in progress, Economics in Two Lessons. There’s a partial draft here if you want to read it in context. I could spend a lot more time on the topic of advertising, but much of the ground has been covered in Akerlof & Shiller’s latest Phishing for Phools. As always, both praise and useful criticism are very welcome.

TANSTAAFL and advertising
We saw in earlier that the ‘free lunch’ provided by saloons wasn’t really free in terms of opportunity cost. Rather, consuming the lunch involves forgoing the opportunity of buying cheaper beer at a saloon where lunch is charged for separately

The same point applies to ‘free’ services provided by governments and financed by taxation revenue. The opportunity cost is the private expenditure forgone to pay taxes. This is the point being made by drivers with TANSTAAFL bumper stickers, even if many of them might be unhappy about paying to use ‘free’ public roads.

There are, however, lots of other examples of services provided free of charge by for-profit corporations. These include radio and TV broadcasts, Internet services like Google, Facebook and Twitter and sponsorship for sporting and cultural events.

Obviously, TV and radio stations, like Google and Facebook, are funded mainly by the sale of advertising. Corporate sponsorship is based on the perception that it will create a favourable impression of the company concerned, which is a kind of advertising. How does our analysis apply to advertising?

In thinking about advertising in TV and similar media, we can easily dispense with the claim sometimes put forward by industry advocates, that such advertising provides consumers with useful information. If this were true, firms would not need to pay TV networks or Internet companies to broadcast the ads.

As is shown by the sales of specialist magazines of all kinds, consumers are willing to pay for useful information about consumer products. But no one will willingly consume ordinary ads unless they are packaged with a program they want to watch, or a webpage they want to view.

In fact, the original free lunch provides a much better analogy. Eating a meal or snack, particularly a salty one, increases the desirability of a cold drink, and the bar is there to provide it.

Similarly, advertisements work because watching an ad increases the desirability of buying the associated product. This may be because the ad attaches desirable qualities (such as sophistication or sex appeal) to the product or because it engenders dissatisfaction with the alternatives we are currently consuming.

In terms of opportunity cost, it does not matter whether an ad works positively or negatively. Either way, the opportunity cost of alternative products is increased relative to the value of the product being advertised. In the standard terminology of economics, a successful ad is complementary (in consumption) with the product being advertised.

In terms of our happiness, though, there’s a big difference. The net effect of advertising is almost certainly to reduce our satisfaction with the things we buy, because most of the ads we see are designed to make us switch to something else. And of course, the things that are not advertised, such as quiet leisure time with family and friends, where no goods and services are required and no money is spent, are downgraded even further.

Market prices tell us about the opportunity costs we face, although the cost, like that of the original free lunch, is hidden. We can choose not to watch the ads (and the programs with which they are bundled), and buy the advertised ‘brand name’ products. Alternatively, we can avoid the ads and buy cheaper alternatives, which don’t include the cost of advertising.

The third possibility is that of watching the ads, but buying the cheaper products anyway. If ads work as they are supposed to, this should induce a similar feeling similar to that of eating salty bar snacks but not buying a drink to go with them. That is, we should feel less satisfied with our choice than if we had not viewed the ads for the brand name product, perhaps so much so that we change our minds and buy the advertised product instead.

Many readers will (like the author) probably judge that they are too strong-minded to be swayed by advertising, particularly the uninformative puffery that we get from mass media. But the continued market dominance of advertised name brands suggests that this is an illusion, similar to the one that leads around 80 per cent of us to believe we are better than average drivers.

Opportunity cost is as relevant to advertisers as it is to consumers. In particular, opportunity cost explains why some kinds of goods and services are commonly bundled with advertising, while others are not. The opportunity cost of producing a TV show or an attractive website can be substantial. But once a given program or website has been produced, the opportunity cost of allowing access to it is small (often less than the cost of restricting access).

In these circumstances, bundling the program with advertising may be the only way to cover the fixed costs of production. If so, the availability of the package as a whole makes us better off compared to the alternative, at least on the (strong) assumption that we carefully consider the hidden cost of the ‘free lunch’ we are being offered.

The problem is more complicated when there are alternatives, such as public funding for broadcasting, which might be financed (as it was for a long time in the UK and Australia) by a license fee for television sets. Choice is maximised when both methods of funding are available, but as a matter of political practice, advertising-funded commercial broadcasters will lobby to have publicly funded alternatives shut down or forced to take ads.

The Internet has shown the power, and the limitations, of a third alternative, that of voluntary provision by individuals (as with blogs) or by large co-operative groups (as with Wikipedia). We’ll discuss this more in Lesson 2.

Finally, it’s worth considering the case when we are forced to consume the advertising whether we want to or not, and without receiving any benefit. The most obvious example is that of highway billboard advertising [as distinct from informative signs regarding the services available at a given exit].

The case where the right to put up a billboard is controlled by (for example) a highway authority, and advertisers have to pay is essentially the same as that of ‘free’ TV and radio. Road users pay part of the cost of providing the highway by consuming ads.

By contrast, in the case where neighbouring property owners can display billboards, neither the road users nor the providers get any benefit. In effect, the owner of the billboard is imposing a cost without any intervening market transaction. In the technical jargon of economics, this is a ‘negative externality’ (we’ll look more at this in Section …).

35 thoughts on “TANSTAAFL: What about “free” TV, radio and Internet content?

  1. Advertising has always seemed more like a tax to me. It’s basically unavoidable because it’s embedded in the products/services we purchase.

    For example, for many years it was rumoured that Toyota spent perhaps up to ~$5000 per Camry in advertising. Perhaps there was an economical efficiency argument to be had – is advertising economical fair? Perhaps it is cheaper for me to pay a bit more to watch my AFL football rather than all of those that aren’t interesting paying a Toyota Tax.

    Of course, there’s the old joke about advertising as well; if they have to advertise the product/service, you probably don’t need it.

  2. “The Internet has shown the power, and the limitations, of a third alternative, that of voluntary provision by individuals (as with blogs) or by large co-operative groups (as with Wikipedia).”
    That’s true of my blogging. I’m retired and the opportunity cost to me is very low. But it’s an inadequate account of JQ’s blog, or those of other busy full-time academics like Brad deLong, Jack Balkin or Scott Lemieux. These are (in the time-consuming part) serious efforts at haute vulgarisation, akin to a free public lecture. In many cases the commitment of time is significant. The academics who do this are I guess more likely to be tenured professors than junior faculty, because they can no longer be sacked for insufficient dedication, and a blog raises their public visibility. The feedback may complement that from students, who have less experience of the world. The blog readership may have some influence on public policy.

    Academic blogging is unpaid and generally professionally unrewarded teaching. The phenomenon does tend to confirm the Humboldt proposition of the complementarity of teaching and research,not for any idealist reasons of the unity of Bildung, but practical payoffs: to the teacher in keeping in touch with the frontiers of knowledge, to the researcher in combating tunnel vision and scholasticism. If academics do it without obvious reward, the payoffs must be significant.

  3. If so, the availability of the package as a whole makes us better off compared to the alternative, at least on the (strong) assumption that we carefully consider the hidden cost of the ‘free lunch’ we are being offered.

    Are you using a specific definition of ‘strong assumption’ here? It feels like it, and I’m not sure I understand the connotations, can you elaborate?

  4. 80% of us could be better than average drivers, if the remaining 20% of drivers were truly awful.

  5. Isn’t there a strong case for replacing advertising-funded television with pay for programs? I have scarcely watched commercial TV for a decade because I get such disutility from advertising. I’d watch it if I could swap the advertising for a moderate fee. If a fee was charged for current public broadcasting as well (as it was when I was young – the “licence fee”) then the partly justified complaint of the private TV producers that they face “unfair” subsidised public broadcasts could be met.

    The presumption that advertising works because firms spend a lot on it is probably true. But people should be trained to resist the impact of advertising and to understand that it is largely lies. It seems to me that linking the telling of commercial life-damaging lies with the provision of entertainment is one of the worst features of modern capitalism.

  6. as it was for a long time in the UK and Australia

    Still is in the UK.

    highway billboard advertising … negative externality

    I beg to differ. I find those big yellow and red billboards advertising cures for premature ejaculation to be very amusing.

  7. @hc

    The presumption that advertising works because firms spend a lot on it is probably true

    As any advertising person will tell you, only half of all advertising works. The problem is you don’t know which half. But I’m with you. Pay to watch is much better, and when television is taken over by the Netflix model, that’s what will be ubiquitous. Advertising really only exists because the technology to make the user pay did not exist, but it does now.

  8. Thanks John

    Looks interesting.

    Comments before I look at the detail.
    – I looked for ‘efficient markets’ but couldnt find anything. This was prompted by my currently reading Nate Silver’s Signal and Noise and encountering his travels with economists…and well justified skepticism about their positions. At least to a Bayesian like me.

    Do you discuss this elsewhere, especially the statistics (mathematics?)? I identified 2 only uses of ‘predict’ . Prediction/inference accuracy seems to be emerging as the ultimate test of whether a model is worth anything but economists seem divided on their perspective on it.

    This for me is an interesting issue/discussion that also goes to the heart of 2007/2008 and the ‘failure to predict’. To what extent are economic changes predictable? One interpretation of this is that the crash couldnt be predicted because fluctuations are too random for anyone to reliably follow.

    That said there is another way of treating stats that I’m familiar with – the Exceedance probability approach widely used for rainfall and runoff – i.e. we cant predict rainfall /runoff with credible probability beyond about a week or two depending on the locality – that cyclone that hit Cairns a few years back after being identied as starting somewhere north of Fiji is about at the extreme.

    However if we have historical data for an area on past rainfall/runoff for an area we can calculate possible events with 100 200 500 up to say 10000 year recurrence probability which is really useful for urban planning – moral of the story is dont build in the Brisbane River valley. And combining these curves with climate change makes for very interesting reading. Unfortunately the success of such methods is misinterpretted by the public and so you get those poor Italian earthquake predictors who were nearly chucked in prison.

    (why this happenned to them and not the economics community from the previous year’s disaster might be fun to speculate on).

    So do you look at the science and art of statistics and prediction – which afterall is what the entrail readers at the Reserve Bank try to do along with those would be Delphic oracle pests….on both sides of the cornucopian/millenial divide…who tell us the world is saved/more frequently than a Jehovah Witness gets raptured in their advertorials.

    – (General query about PfP) Does this also cover the murky overlap between advertising and public relations/corporate affairs of which organised climate change denial and interference with politics especially in the US seems a manifestation.

    – Next draft – could you maybe save the PDF with the heading numbers to help scanning it? (I assume you are using the auto headings).

  9. ps comments above relate to the draft book rather than the matter of advertising. Apologies for the tangent.

  10. The operations and effects of capitalist advertising are both emblematic and indicative of what is wrong with capitalism itself. If advertising shifts consumption it is essentially a negative sum game (the cost of the advertising is essentially a waste). If it increases consumption it can appear to be a positive sum game for the economy in GDP terms.

    However, over-consumption has become a problem in its own right. People become overweight and unhealthy (increasing medical costs on the way) and their lives become cluttered with too much stuff. The environment bears the cost of over-consumption in the form of pollution, species extinctions, climate change etc.

    Why is over-consumption promoted? The fundamental answer can only be that capitalism attempts in this manner to deal with its over-production crisis. The plain fact is that capitalism now produces too much stuff or at least too much of the wrong kind of stuff. Thus, in a large part of the economic cycle, it must keep idle a proportion of its capital plant and a proportion of its people.

    If you doubt that overcapacity is a central problem of modern capitalism, you simply have to look up the term on your search engine. You will see headlines like: “Overcapacity casts shadow on world’s largest auto market ” , “Massive Overcapacity In The Steel Industry In 2015”, “Overcapacity in oil and gas” and so on. Of course, global poverty can still exist in a condition of overcapacity. Productive overcapacity is a relative condition. It is overcapacity relative to consumption power, overcapacity relative to ecological capacity and so on.

    What characterises capitalism in this arena is its inability to shift production to genuinely needful areas. The capitalist system persists in creating internal combustion engine automobile manufacturing overcapacity and then trying to advertise these products into consumption rather than shifting productive effort to what can be logically demonstrated is the real pressing need. The real need is for more efficient mass transit, a reduction in greenhouse gas emissions and a reduction in general pollution.

    A rational system (in the true sense of the word), if still utilising advertising, would be advertising the need to phase out IC engine autos and advertising clean, and to implement efficient mass transit and electric vehicles. This stubborn persistence in making and advertising the wrong products for this new global situation indicates the profoundly maladaptive, conservative and unimaginative nature of capitalism at this historic phase. Capitalism was once radical and progressive. It is now ossified and backward looking, repeating what worked yesterday and what is now no longer the correct set of activities for further progress and a sustainable economic system.

  11. over consumption has become a problem in its own right. People become overweight and unhealthy

    Does this mean that advertising by gyms and personal trainers is a good thing?

  12. A very minor point about “80 per cent of us to believe we are better than average drivers”. I don’t think that this is a good analogy because the question “are you better driver than the average driver” is nonsense, since there is no metric for driving skill, and until you have a measure, you can’t have an average, unless by “average” you mean “typical” but then you can’t get a contradiction.

  13. @Uncle Milton

    I (or someone) would have to check if any studies have been done. With regard to the health and exercise industry, I would like to see answers to questions like;

    (a) How much of home exercise equipment is rarely or never used?
    (b) How much of vitamin consumption is unnecessary for basically healthy, well-nourished people?
    (c) Are exercise machines and gyms really necessary for ordinary, healthy people? What can’t you achieve for average health and fitness simply by walking or jogging and doing exercises using the body as weight and leverage?
    (d) Perhaps gyms and special exercise machines are more appropriate for specialist athletes on the one hand and people doing rehabilitation on the other hand?

    I mean, I can’t believe the number of ads for home exercise machines on TV. Do most of these things really work? How many are faddish? How many break quickly? How many languish in basements or rumpuses gathering dust? It’s like all the diet fad books. The fact that these DON’T work is the main reason they can keep selling them.

  14. @Ikonoclast

    In keeping with the TANSTAAFL theme of this thread, most of these home exercise machine commercials appear to promise great results with little effort. (The same goes for miracle diets). You can make a lot of money by promising people AFL, notwithstanding TANSTAAFL. (This seems to be in-grained feature of human psychology. For hundreds of years, maybe thousands, people have been searching for a perpetual motion machine, which is the ultimate FL.)

  15. An interesting read and made me wonder how these ideas apply in the Community Services sector.

    Commercial advertising in general is not informative and attempts to manipulate the consumer by engendering some emotional response, often using stereotypes, that they hope will increase the desire for the product or brand. In contrast, Community service providers are generally using advertising to inform but with a secondary motive that they want those in need of their services to actually use them. They are usually in competition with others for government funding and need to demonstrate both usage of their services and ‘efficiency’ most often expressed in terms of the cost of delivery rather than outcome. Also, many of theses services are “free” insofar as the consumer is not paying for the service directly.

  16. One of the negative effects of advertising on broadcast media is that the TV content is “shaped” by the need to deliver advertising revenue within a given program slot. Take a progressive which has thriller elements to it: the scene construction is such that, once edited, there is a particular format in time that the program must adhere to, and this in turn feeds back into the story construction to meet that demand. Telling a story in an interesting but unconventional way is taboo if it interferes with the advertising placement during the program slot. The format is so rigid, it must have some impact on the quality of the programming, I would have thought.

  17. Ikon is right – the advertising we have today reflects an underlying contradiction of capitalism.

    The Monthly Review article points out that:

    price competition is avoided as a response to the insufficiency of demand and other forms of sales effort are substituted. “The rivalries of the business world are nowadays as keen or keener than ever.

    So the issue is “insufficiency of demand” which is a structural contradiction of capitalism – not business.

    There is also the problems of dishonesty, alienation and fetishism which capitalists typically resort to.

    As usual, our Nobels are paddling the wrong canoe.

    Advertising – Regulation

    Giving capitalists regulated markets will only see them laugh all the way to the bank. As for the NYTimes’ author: has anyone seen any reputable source claim that an unregulated competitive economy is optimal

    for everyone


    You do not need high-blown psycho-advertising if workers wages are properly funded and supplier’s supply schedules merely cover necessary costs in the long-run without the imposition of capitalist super profits.

  18. Much advertising is concerned with the promotion of public good.
    Examples include advertising for HIV testing, vaccines campaings, solar rebates, anti drink driving campaigns and charity appeals.
    Any discussion of advertising that ignores these significant shapers of behavior only tells part of the story.

  19. @Harleymc

    What proportions of advertising are for these public good announcement and what proportions are for fossil fuel powered cars, junk foods, alcohol and gambling and so on? I suspect that only a tiny proportion of advertising is for these public good announcements. My estimate would be 1% or less.


  20. @Ikonoclast

    “How many languish in basements or rumpuses gathering dust? It’s like all the diet fad books. The fact that these DON’T work is the main reason they can keep selling them.”

    These stupid things so often unused go to the op shop; exercise machines, kitchen appliances that just take up space on the kitchen bench, designer ceramics and other sorts of dust collecting things that one display’s in one’s house to signal one has good taste.

    And the book section is fascinating – expensive coffee table books that have never been read or even looked at.

    So much baby stuff and toys toys toys, handbags and shoes jewlery and clothes; Op shops are full of the stuff that people buy because they have been manipulated into thinking they need to buy stuff that will make them happier and healthier.

  21. @Julie Thomas

    I agree. It’s amazing the junk a family of four can accumulate. From what I can tell, we hoard less than most families and spend more on intangibles (e.g. education). We also keep (second hand) cars and furniture much longer than most, using them up until they are entirely worn out. We are not collectors in any sense. Even given these characteristics, it takes an effort to stop the junk piling up. There is something about the way modern life is constructed which exerts a remorseless pressure to buy “stuff” which very soon turns into junk.

  22. @Ikonoclast

    My fridge is famous among my aspirational rellies for it’s age and it’s disgusting external appearance and it doesn’t even make ice cubes!!! – but the seals are still fine and my electricity bill is still lower than that of the ‘average’ family of our size. I might paint it one day with flowers and butterflies.

    I bought it the day before my second son died in a motorcycle crash over 20 years ago so it has sentimental value and it will be a very sad day when it dies.

  23. @Julie Thomas
    Although (for those who place high importance on energy efficiency) it is worth investigating updating some appliances. Clothes dryers in particular (yeah, I know, we shouldn’t use them) utilising heat pumps are considerably more efficient compared to the older heating element types.

  24. I think JQ that your bold launch into advertising is probably technically solid from the opportunity cost perspective but a little lopsided from other perspectives. There are lots of advertising channels all with differing properties

    letterbox mail….paid for by the product manufacturers…..largely stores advertising themselves
    newspaper….. ads paid for by the advertisers….supports the paper’s production cost
    newspaper classifieds….paid for by the advertiser…to the benefit of the responder (jobs assets property)
    magazines…..paid for by the advertiser…supports production cost…to the choice benefit of the reader (from one small ad in a technical publication I spent $150,000 on a machine which is central to my business performance and the employment of 5 people, what is the opportunity cost there)
    billboards….paid for by the advertiser…..loss to the environment…brand advertising
    radio…..paid for by the advertiser….completely supports costs…to the choice benefit of the listener.
    television fto…. paid for by the high end advertiser…completely covers production costs and dominately supports some professional sports… very marginal benefit to the viewer
    television other….paid for by the user and the advertiser…supports Rupert Murdoch… a nett loss to the subscriber.
    television cable network shopping channels…what can I say
    internet…paid for by the advertiser….largely brand support…minimal effect on the internet user.

    It is a very mixed bag. Television advertising is a bad choice of model as it is highly distorted by sporting event access costs to the extent of making the medium substantially dysfunctional. unfortunately one of the most stable and efficient advertising systems, the classifieds, has been fractured by the internet and there is no clear future path here.

    Our lives are very much a sensory exploration experience from birth to death. We are wired to seek out new stimulation and this is the human condition that makes advertising work. But we also have a lifelong progression of need. This is what makes advertising beneficial. I personally doubt that the economics of advertising can be conveniently or simply parameterised when its performance is everything from total waste to employment expanding.

  25. @Uncle Milton
    And when they introduce advertising on Pay To Watch? This has occurred on cable TV, no doubt it will eventually occur on the Internet based model.

  26. @Ikonoclast

    Conspicuous consumption is an inevitable consequence of modern capitalism.

    What is interesting is the way the conspicuous consumption of ‘stuff’ has been extended into the realm of information production and consumption. The modern web browser allows us to consume massive amounts of information much of it useless of course and it would seem that the marketisation of information is leading to greater fragmentation and biased dissemination of information. ( R Taylor Arthur 2014 “Postmodernist and Consumerist Influences on Information Consumption, Kybernetes vol 43. Issue 6)

  27. I am a worse driver than the median.

    When my daughter got her learners permit, she tells me, each of her friends who had experience as a passenger when I was driving advised her not to have me teach her to drive.

    It’s good that she has friends who are concerned for her.

  28. @J-D
    I have no idea if I’m better or worse than the median, but I know I’m better than your typical ute driving tradey at 3pm on a Friday along a major arterial 🙂

  29. Apple’s recent move to allow ad blockers into the apps store has raised this question in a lot of on-line commentary. If you can block all ads, you can’t get ‘free’ content. Mind you, many free mobile games solved this problem years ago – pay a one-off fee for the premium (i.e. ad free) version.

    Also, some free online papers are so choked with ads that they chew both your data and your bandwidth. But many don’t want to pay the price of a paywall.

    Debate continues, no clear end in sight.

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