Sunk Cost Law and Legal Definition

Sunk cost is a cost that is incurred in the past, that is irreversible and that cannot be recovered regardless of future events. For example, a worn out piece of equipment bought several years ago is a sunk cost because the cost of buying it cannot be reversed. Another example for a sunk cost is the cost of a seat on an airplane. The cost of an airline seat is primarily fixed and sunk with a small portion attributed to variable costs for additional services. Thus, an airline can develop a pricing structure designed to maximize the revenue of the aircraft by changing their pricing depending on the demand for a particular flight, and by offering additional benefits. Sunk cost is also referred to as stranded cost.