Home > Economics FAQs Blogs > What are good examples of sunk costs?
This question pertains to topics in Microeconomics, such as Sunk Costs
Sunk Costs: Sunk costs are costs that have already been incurred and cannot be recovered. Sunk costs are excluded from future business decisions because the cost will be the same regardless of the outcome of a decision.
Sunk costs are typically contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. In theory, decision-making should only be influenced by prospective costs and not by sunk costs, since monetary expenditure that has already occurred and cannot be recovered should not influence the decision about future expenditures. However, in practice, people often fall prey to the "sunk cost fallacy" and allow sunk costs to influence their decisions.
A Non-refundable Plane Ticket: Let's say you bought a non-refundable plane ticket to London for a vacation. However, due to unforeseen circumstances, you can't go on the trip anymore. Regardless of whether you use the ticket or not, the money spent on the ticket cannot be recovered, thus, it's a sunk cost.
Investment in Technology: A tech company investing millions into the research and development of a new product which ends up being a failure is an example of a sunk cost. The money spent on the development of the product cannot be retrieved, regardless of whether the company continues to invest in the product or abandons it.
In summary, sunk costs refer to costs that have already been incurred and cannot be retrieved or altered. Examples of sunk costs can include anything from a non-refundable purchase, like a plane ticket, to large investments made by companies in product development. In theory, these costs should not affect future decision-making, but in reality, they often do due to the 'sunk cost fallacy'.
