Opportunity cost is one of the most important concepts in microeconomics. A solid understanding of opportunity costs both allows us to make better decisions and to better understand the decisions made by others. However, the concept is often used erroneously, as it was earlier this week by an Ontario politician.
A straight-forward definition of opportunity cost is found at About.com:
The opportunity cost of any action is simply the next best alternative to that action - or put more simply, "What you would have done if you didn't make the choice that you did".
There are two key points in this definition:
- The alternative has to be feasible, that is it was an available option that the person making the choice had.
- There has to be a real tradeoff. It is not possible to have A and B at the same time. By choosing A we give up the opportunity to obtain B.
The first point is often violated in erroneous opportunity costs when relationships end. I am sure we have all seen this at some point in our lives. A couple breaks up and one (or both) of the ex's decides to start dressing better, loses 20-30 lbs, gets into shape, etc. in order to show their former partner "what they're missing". It's not at all a valid opportunity cost argument, because the person wouldn't have taken all those steps had they still been in the relationship. The opportunity cost of being out of the relationship is not being in a relationship with the out-of-shape, sweatpant wearing person - not with the well dressed physically fit person they later became.
Before I discuss the second point, I need to add the following disclaimer. I am not trying to make a partisan point here - all political parties, at some time or another have used some form of this argument. This time it was the Ontario Progressive Conservatives, but next time it could be the Ontario NDP, Greens or Liberals.
A few days ago I opened up my hometown London Free Press and found the following article: Province likes fast food calorie count idea:
Ontario could move ahead with forcing restaurants to post the calorie counts of their meals, Health Promotion Minister Margarett Best said Wednesday.
An interesting idea that I was looking forward to hearing arguments both for and against. The bottom of the article PC leader Tim Hudak gave his reasons for being opposed to the plan:
“There’s a lot of red tape out there and what I’m hearing from families is that life’s getting more expensive,” he said. “What their top priority is is lowering the taxes their paying.
“I don’t hear them worrying so much about what the menus say,” Hudak said. “I’m hearing about how much more prices are increasing.”
It appears that Hudak is making an opportunity cost argument here (though there may be alternate intepretations) - that the Liberal government should introduce a bill lowering taxes, not one introducing calorie counts on the menu. But why can't the Liberals do both? At any one given time the legislature is juggling about two dozen bills. There is absolutely no reason this session of the legislature cannot debate both issues. Where is the opportunity cost here? I don't see it.
There are all kinds of opportunity costs when it comes to public policy. I just wish politicians of all parties had a better understanding of the concept. It would lead to improved public policy and a more informed electorate.