That instant AI answer felt free. It wasn't. Somewhere, a datacenter just drew more power to generate it than your laptop uses in an hour — and the economics nobody sees are quietly shaping the whole industry.
We've been trained to think of software as basically free to run — copy a program a million times at no marginal cost. AI breaks that intuition, and the break matters for anyone building or betting on it.
Every token costs
Traditional software is nearly free per use. AI is not. Every response an LLM generates burns real computation on expensive, power-hungry hardware, one token at a time. Unlike a database lookup that costs fractions of a cent, generating a long, thoughtful answer runs specialized chips hard and draws serious energy — with water and electricity behind it that rarely show up in the conversation.
This is why your "free" AI tool is almost always subsidized — by a provider spending heavily to win users, betting costs fall later. The price you don't pay is being paid by someone, for now.
Why this shapes the product
Once you internalize that inference has real marginal cost, a lot of industry behavior makes sense:
- Rate limits and tiers exist because every request costs the provider money — they're managing a real bill, not being stingy.
- Smaller, cheaper models are pushed hard because serving a giant model to everyone for every trivial task is economically brutal.
- The "route to the right model" pattern — a cheap model for easy work, an expensive one only when needed — is as much about economics as quality.
Building AI products well means treating tokens like the metered resource they are: don't send the giant model what a small one can handle, don't stuff a context window you're paying for with junk, cache what you can. That cost-awareness is exactly the engineering discipline I bring to the systems I build — the same instinct as watching memory or bandwidth in any constrained system.
The energy question is real
Beyond dollars, there's a physical footprint. Training and running large models at scale consumes meaningful energy and water. This is a genuine, unsettled challenge — and part of why the industry cares so much about efficiency, smaller models, and better hardware. Efficiency isn't only about saving money; increasingly it's about whether this scales responsibly at all.
The takeaway
"AI is free" is a temporary illusion, funded by investment and the hope of falling costs. The engineers and companies that will win are the ones who never believed it — who treat every token as something that costs compute, energy, and money, and design accordingly. Intelligence, it turns out, has a per-unit price, and pretending otherwise is how you build something that can't sustain itself.
Next time an answer appears instantly and free, remember there's a meter running somewhere. Designing as if that meter is real is the difference between an AI product that scales and one that quietly bleeds. More on how I approach it at www.divyakush.com.
Related reading
- The context window: an LLM's working memory and its limits — because every token in that window is a token you pay for.
