Opportunity Cost vs. Sunk Cost: What's the Difference?
The Definitions
Opportunity cost is the value of the next best alternative you give up when you make a choice. It is forward-looking: it exists only because you still have options and can only choose one. A sunk cost is a cost that has already been incurred and cannot be recovered no matter what you do next. It is backward-looking and, critically, identical across every option still on the table. Economists therefore give a sharp rule: opportunity cost belongs in every rational decision, and sunk cost belongs in none. A cost that does not differ between your alternatives cannot help you choose between them.
The Classic Illustration
You buy a non-refundable concert ticket for $60. On the night of the show, a friend offers you a free ticket to an event you would rather attend. The $60 is gone whichever you choose, so it is a sunk cost and should play no role. The relevant question is only which event you prefer now — and the opportunity cost of attending the concert is the enjoyment of the alternative event you would forgo. Many people go to the concert anyway "so the money isn't wasted." That instinct is the sunk cost fallacy: it lets an unrecoverable past payment dictate a present choice, making you worse off in the only terms that remain available.
Why the Confusion Persists
Both concepts are lumped together as "costs," and both feel intuitively like reasons not to abandon a course of action. But they differ on the one dimension that matters for choice: whether the amount varies with the decision you are about to make. Sunk costs also carry psychological weight — behavioral research documents escalation of commitment, in which people invest further precisely because they have already invested. Businesses and governments continue failing projects for exactly this reason. Recognizing that a cost is sunk does not make it painless; it simply means the pain is unavoidable and therefore irrelevant to picking the best remaining option.
Where Each One Shows Up
Opportunity cost appears wherever economists distinguish economic from accounting reasoning: implicit costs in the theory of the firm, the real interest rate as the cost of holding money, the wage forgone by staying in school, and comparative advantage in trade. Sunk costs appear in the theory of market entry and exit — a firm should keep operating in the short run as long as revenue covers its variable costs, because fixed costs already committed cannot be recovered by shutting down — and in discussions of barriers to entry, where large unrecoverable start-up investments deter new competitors. On an exam, the tell is the tense: money already spent is sunk, options still open carry opportunity cost.