Opportunity Cost

The real or opportunity cost 

 

is the 

 

alternative forgone.

 

National economic management is formulated to achieve ‘efficiency’ – that is, producing the most satisfying mix of goods and services with the most efficient combination of resources with the least waste and with resources as fully employed as possible and with minimum negative environmental costs.

A tall order by anyone’s measure!

As anyone knows we can’t have it all, there are trade-offs with any choice we make.

The real or opportunity cost of any choice is the value of the alternative forgone.

It’s true on a societal level and a personal one. We face limitations, both with our time and money.

Budget constraints force us to make choices about how we spend the limited income we have at our disposal. After we have paid taxes, we allocate our income and either spend it or save it.

If we can save, we can then choose what to do with the savings, but

 

an individual’s evaluation

of the allocation of their funds is

subjective and

will depend on their 

ATTITUDES

 

 

 

Do you remember when your parent used to say “because I said so!”? You knew there was more to the story, but you knew they just didn’t have the time or energy or will to explain why!

Take the now-defunct carbon tax as an example. Observing the debate it seemed to me that politicians typically lack sufficient skills to convince any kid they need to eat their greens, let alone the voting public that it needs to pay more for the things they buy!

Pollution is a negative externality; an undesirable by-product of another productive activity and is an example of market failure. It’s widely understood that the factors of production involved in producing an item determine its cost. What most people are not conscious of is the hidden costs, those that aren’t obvious, the costs that we all bear whether we buy the product or not. The most obvious example being pollution.

Price is a rationing device and the only way to make consumers bear the actual cost of a product, and perhaps change their consumption patterns, is to internalize or price the hidden costs, in other words, make them pay for it.

For those who have teenage children, how many times have you caught yourself saying things like, “wait till you’re paying the bills, then you’ll switch off the lights”!

True?

That’s because they don’t yet bear the cost, their usage of your electricity is not priced; it’s not internalized.

But at the same time, I do feel sorry for policymakers because there are no easy answers. Opportunity cost, the alternative foregone is never more apparent than when looking at the competing claims on the budget. Every budget decision means that some other wish has to be crossed off the list or at best trimmed back. There is also the unintended trade-offs that come with policy decisions.

Ever been to a dinner party or BBQ where someone pronounces with the enormous certainty that ignorance allows, “the government should just….”?

Similarly, those that claim housing affordability will be magically fixed by changing the tax rules around negative gearing don’t seem to have any inkling (or alternative suggestions for that matter) about how the public sector would provide all that rental accommodation in the absence of investor activity. They have even less appreciation of the private vs public efficiency trade-off or the likely effect on rent of an investor exodus from the housing market. One politician recently responded to the suggestion by saying “oh, it’s complicated”. Really?! They should be able to do better than that! They could:

Explain that tax breaks for investors encourage the supply of housing in an already constrained market more cost-effectively than the public sector could ever do and that it encourages a rapidly aging population to invest for the future and reduce the burden on the future public purse.

Explain that housing starts are a leading indicator of economic activity and therefore, jobs and the multiplier effect of house construction is huge. Building new properties has a ripple effect on consumption that is hard to replicate.

Explain that the new driver of growth and therefore jobs are population growth and the houses and infrastructure and services they will demand, all 32,000,000 of us by 2033. That’s less than 13 years from now! Incentivizing the simple ‘changing of hands’ in the property investment market may be a lot less socially beneficial than encouraging new construction.

But then things are never that simple….