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ECONOMIA CIV D

Opportunity Cost

JAMES M. BUCHANAN

The concept of opporitinity cost (or alternative cost) expresses the basic
relationship between scarcity and choice. If no object or activity that is valued
by anyone is scarce, all demands for all persons and in all periods can be
satisfied. There is no need to choose among separately valued options; there is
no need for social coordination processes that will effectively determine which
demands have priority. In this fantasized setting without scarcity, there are no
opportunities or alternatives that are missed, foregone, or sacrificed.
Once scarcity is introduced, all demands cannot be met. Unless there are
‘natural’ constraints that predetermine the allocation of end-objects possessing
value (for example, sunshine in Scotland in February), scarcity introduces the
necessity of choice, either directly among alternative end-objects or indirectly
among institutions or procedural arrangements for social interaction that will,
in turn, generate a selection of ultimate end-objects.
Choice implies rejected as well as selected alternatives. 0 pportunit y cost is
the evaluation placed on the most highly valued of the rejected alternatives or
opportunities. It is that value that is given up or sacrificed in order to secure
the higher value that selection of the chosen object embodies.

OPPORTUNITY COST AND CHOICE. Opportunity cost is the anticipated value of

‘that which might be’ if choice were made differently. Note that it is not the
value of ‘that which might have been’ without the qualifying reference to choice.
In the absence of choice, it may be sometimes meaningful to discuss values of
events that might have occurred but did not. It is not meaningful to define these
values as opportunity costs, since the alternative scenario does not represent a
lost or sacrificed opportunity. Once this basic relationship between choice and
opportunity cost is acknowledged, several implications follow.
First, if choice is made among separately valued options, someone must do
the choosing. That is to say, a chooser is required, a person who decides. From
this the second implication emerges. The value placed on the option that is not

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© Palgrave Macmillan, a division of Macmillan Publishers Limited 1991
chosen, the opportunity cost, must be that value that exists in the mind of the
individual who chooses. It can find no other location. Hence, cost must be
borne exclusively by the chooser; it can be shifted to no one else. A third
necessary consequence is that opportunity cost must be subjective. It is
within the mind of the chooser, and it cannot be objectified or measured by
anyone external to the chooser. It cannot be readily translated into a
resource, commodity, or money dimension. Fourth, opportunity cost exists
only at the moment of decision when choice is made. It vanishes
immediately thereafter. From this it follows that cost can never be realized;
that which is rejected can never be enjoyed.
The most important consequence of the relationship between choice and
opportunity cost is the ex ante or forward-looking property that cost must
carry in this setting. Opportunity cost, the value placed on the rejected option
by the chooser, is the obstacle to choice; it is that which must be considered,
evaluated, and ultimately rejected before the preferred option is chosen.
Opportunity cost in any particular choice is, of course, influenced by prior
choices that have been made, but with respect to this choice itself, opportunity
cost is choice-influencing rather than choice-influenced.

OTHER NOTIONS OF COST. The distinction between opportunity cost and other
conceptions or notions of cost is best explained in this choice-influencing
and choice-influenced classification. Once a choice is made, consequences
follow, and these consequences may, indeed, involve utility losses, either to
the person who has made initial choice or to others. In a certain sense it may
seem useful to refer to these losses, whether anticipated or realized, as costs,
but it must be recognized that these choice-determined costs, as such, cannot,
by definition, influence choice itself.
A single example may clarify this point. A person chooses to purchase an
automobile through an instalment loan payment plan, extending over a three-
year period. The opportunity cost that informs and influences the choice is
the value that the purchaser places on the rejected alternative, in that case the
anticipated value of the objects which might be purchased with the payments
required under the loan. Having considered the potential value of this
alternative, and chosen to proceed with the purchase, the consequences of
meeting the loan schedule follow. Monthly payments must be made, and it is
common language usage to refer to these payments as ‘costs’ of the
automobile. The individual will clearly suffer a sense of utility loss as the
payments come due and must be paid. As choice-influencing elements,
however, these ‘costs’ are irrelevant. The fact that, in a utility dimension,
post-choice consequences can never be capitalized is a source of major
confusion.
Economists recognize the distinction being made here in one sense. With
the familiar statement that ‘sunk costs are irrelevant’, economists
acknowledge that the consequences of choices cannot influence choice itself.
On the other hand, by their formalized constructions of cost schedules and
cost functions, which necessarily imply measurability and objectifiability of
costs, economists divorce cost from the choice process.

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Idea 1: Life is full of situations in which we have to choose and this implies giving
up things, when a person decides whether to study or not in this case I will take
myself as an example, it was clear that if I entered to study I would benefit from
enrichment intellectual property, obtain a university degree, the prospect of having a
good job in the future and the opportunity to innovate as a future Civil Engineer,
among others, being aware that it would cost me a lot of money, books,
accommodation and above all time since if I chose to study I would not I could at
the same time dedicate myself to work giving up a salary that I could hypothetically
have.

Idea 2: Ethics includes issues of responsibility, problem solving and decision

making, every day the engineer finds himself in the need to make choices for each
activity he performs since there are always an infinity of options to choose from and
more than one way to solve a problem, he chooses the way that suits him best and
pleases him, the problem is that each one has personal interests which directly affect
ethics, the engineer carries with him the enormous responsibility of making
decisions on which he depends on choosing to think about the common good or in
the worst case only in them making individual decisions above the interests of the
group and society.

Idea 3: Almost all decisions imply giving up something, when you decide you
have to put something aside, because if I chose A I cannot choose B, if the resources
to do a work were infinite or unlimited, there would be the opportunity to make an
excellently elaborated construction , satisfying all the needs of the community that
needed it, being this extremely expensive, but in reality in most situations resources
are limited and scarce, therefore it is the moment where the engineer enters to do
analysis and make the best option characterized by being efficient and making the
least amount of mistakes so that with a lower budget or scarcity of this one can do a
good work.

Idea 4: The engineer must know how to make decisions and when to do it. This
requires you to master tools to choose the best decisions in uncertain scenarios for
the organization where you are working. When the decisions to be made are not
structured, the engineer must prepare a model that allows him to reduce the
uncertainty in the decision-making process, taking into account that all the
responsibility falls on him.

Idea 5: The subject when acquiring the vehicle abides by the consequences of
paying expensive installments every month for a considered time, we do not know
what consequences the making of this decision will bring on his personal finances,
since this person may have to use around 20% of your salary to pay it as it may not
affect your economy at all.