How many resources should we devote to fixing a problem, when the technology to fix it, potentially, is ‘out there,’ and we could, if we chose, use it to try to make the situation better? The answer to the question is another question—at what price? All of us come across a problem from time to time whose solution is so costly that we decide not to go ahead with fixing it, or we look for a more cost-effective way. Fortunately, markets usually offer many alternative ways to accomplish the goals we are after.
Here’s an example. I have recently had to deal with a couple of household appliances that went bad unexpectedly. Within as month, both my home hot water tank and refrigerator quit working. I prefer to have the services of both a working hot water heater and a working refrigerator. So when my water heater began leaking, I made some choices. Since repair wasn’t recommended, or even feasible, I gave up on having hot water—from that tank. Though expensive, a new water heater is not as costly to me as doing without hot water. In economic terms, the added benefit to me from the convenience is greater than the added cost. So I paid the price asnd replaced the tank.
Similarly, when my refrigerator quit, I compared the price of repair to the price of a new fridge, and went with the new fridge. The net result of my decisions? I have hot water. I have refrigerated food. And by choice, I’m also going without the benefit of other things I could have had in addition to these—if I’d never had the problems, and not chosen to have a lot of cash go out the door at once.
The value of my foregone purchases are my opportunity costs. Opportunity costs are the value, to me, of the things I’ll have to do without. The vendors I don’t patronize will never know they lost business. But the importance I attach to hot water and cold food made diverting money a priority at that point.
It doesn’t always work this way. If I have unrepaired items sitting around the house, but no urgent need for them at the moment, they wiil probably remain in limbo. Maybe I’ll discard them without replacement. As a rule, people prioritize their needs and goals first; that allows them to prioritize how and on what they should spend their limited time, money, and other resources.
The most urgent problem doesn’t always get the greatest amount of our resources, though it probably gets them first. And the most expensive way to solve a problem isn’t always the most efficient way. Markets frequently offer alternative routes to the same end. In medicine, patients with blocked arteries may have life-or-death treatment needs. But which treatment, and at what cost? Even with life and death at stake, some medical professionals argue that using the most expensive, cutting-edge procedure may not be the most desirable option. Using more resources than necessary to get the desired end may make the opportunity costs of treatment higher than they need to be.
Likewise, the question of where, when and what resources government uses to address public policy issues definitely arises in statewide policy discussions. Of note are the analysis and proposals that address highway traffic congestion and environmental quality issues around the state. It’s no less true that the need to prioritize goals, look at added costs and benefits, and consider opportunity costs are at least as important here as they are for individual consumers. The very things we want most to know before we commit resources–the value to us of alternative choices, or opportunity costs–are even harder to assess because we are attempting to calculate them in a collective setting—a topic for another Minute.
How many resources and where to commit them? When individuals make decisions for themselves, they have no responsibility to justify their choices to anyone. When policy makers make choices with public funds, both the policy goals and the means are legitimately subject to scrutiny, and some kind of opportunity cost-benefit rule.