You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50.
According to Alex
I have a hard time believing that this is possible but 78 percent of the economists gave the wrong answer! This is not a hard question. There is no trick... This is a professional embarrassment... By the way, if you really want to learn economics come to GMU. I guarantee that your professors understand opportunity cost. We are also good on scarcity and incentives... The answer is b, $10. Your next best alternative to the Clapton concert is attending the Dylan concert which has a benefit of $50 and a cost of $40 or a net benefit of $10. The net benefit is what you give up by attending the Clapton concert.
My answer was (d) $50, so I filed the question away to return to at a later date. Recently I was at a management training program and the following question (or something similar) was posed:
You have a choice between three different projects, and these are the associated profits. What is the opportunity cost of choosing project 2?
Cue much discussion between those who answered $200, and those who answered $50. As I recall, Emily Chamlee-Wright offered a succinct and satisfactory explanation: your opportunity cost is the value you forgo. It is important to understand the net cost of a particular decision but opportunity cost is an input into that computation, not the solution.
This prompted me to dig out the Alex Tabarrok post, and take a little heart from being one of the 78% of economists who "doesn't understand opportunity cost". I take even more heart to read Tyler Cowen's response:
But just as "cost" was a gross term, so does "opportunity cost" stay a gross term, it does not become a net one. Only the word "opportunity" has been added to "cost," so why leap from gross to net thinking?
G.L.S. Shackle wrote about a "skein of imagined alternatives." This captures the "gross" idea properly, and remains subjectivist, but it doesn't encourage the leap into the mix of net thinking and consumer surplus, which remains a separate concept.
Indeed Christopher Decker offers a more formal defense. The bottom line is that it's important to wrestle with these issues, to recognise the difference between a semantic critique and a substantive one, and to be humble about what we don't know (yet persuasive about what we do know). I'm with Shackle.