Costs, Opportunity

The notion of opportunity cost is one of the fundamental concepts of economics. If resources are limited, then there is a choice to be made between desirable, yet mutually exclusive, results. The true or opportunity cost of one alternative is the benefit foregone from not being able to have the next best alternative. The concept has been encapsulated in the truism that “there's no such thing as a free lunch,” meaning that things that appear free are always paid for in some way.

The estimation of the opportunity cost of a policy will almost certainly vary depending on the person or persons who are doing the assessing. For example, if a health authority is considering building and staffing a new hospital from public sector funds, the opportunity cost might be the benefit that could have been obtained by increasing or improving facilities and staffing at neighbouring healthcare providers. From this point of view, the choices might be represented as between different policies with the aim of maximizing health, given the funds available to the health authority. However, from the point of view of the public sector as a whole, the opportunity cost might be that this money could have been used to improve the criminal justice system. From this point of view, the choice or trade-off is between improved health and improved criminal justice. From a wider, societal perspective, the evaluation might consider that investment by public services might in some circumstances displace investment by the private sector.

Opportunity cost is a wider concept than accounting or monetary cost. Accounting cost attempts to value the outcomes and resources used in a program or policy at their monetary cost or price. However, not all the outcomes and resources of the policy may have a monetary cost, or there may be no market in the good or service with which to value that outcome, or the price may be [Page 234]thought to omit some important aspect of the benefits or costs of the good or service. If these benefits and costs fall on third parties, they are known as externalities. As an example, consider the use of an intensive care bed after a surgical operation. The monetary value of an hour of care in that bed that is charged to the patient's health insurance or health authority might be calculated as the sum of the hourly salaries of the medical and nursing staff attending the patient, the use of consumables and drugs, and the overheads of the hospital. However, in many hospitals, intensive care facilities are very scarce. The use of this facility by a patient might mean that another patient's planned operation must be postponed until a bed becomes spare, in case it is needed. In these circumstances, the opportunity cost of use of the bed by one patient might be considered in terms of the inconvenience, risks, and costs of cancelling another person's operation. Irrespective of whether resources are allocated to healthcare services by a market mechanism or by a government ministry, they must be valued at their true or opportunity cost if society is to invest its resources efficiently.

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