Sunk cost
Topic: Production Function, Returns and Costs · NCERT: Beyond NCERT
Meaning
A sunk cost is money already spent that cannot be recovered in any way. Because it is gone whatever the firm does next, a rational firm ignores it when making decisions about the future. Continuing a losing project only because "we have already spent so much" is the sunk-cost (Concorde) fallacy.
Example
A telecom company pays a non-refundable spectrum fee. It then finds that a new service will lose money. It should decide based on future costs and revenue, not on the fee it has already paid. Other examples are R&D already done and specialised machinery with no resale value.
Don't confuse with
- Fixed cost: it does not change with output, but it may be avoidable in the long run or on exit. For example, rent ends with the lease. A sunk cost can never be recovered.