Explain the Meaning of Opportunity Costs

Explain the meaning of Opportunity Costs.

Opportunity Cost is what is given up to get something else. The opportunity cost of any given choice is the most valuable forgone alternative that is the best second alternative. The concept of opportunity cost was developed in the early 20th century by Friederich Wieser. Opportunity Cost is not assessed in monetary terms, but rather in terms of anything which is of value to the person doing the assessment. The consideration of opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Assessing opportunity costs is fundamental to assessing the true cost of any course of action. Opportunity cost is not the sum of the available alternatives, but rather of benefit of the best alternative of them. Any decision that involves a choice between two or more options has an opportunity cost.

*Example:

Today, the global warming situation if affecting the entire world. In a recently article posted on USA Today, the United Nations is calling the United States to be part of a climate change agreement, since we are the world’s top emitter of greenhouse gases. The opportunity cost in this case, actually has been making a difference in many lives, an example would be when a person substitute his/her gasoline car for a hybrid car. The opportunity cost would be the contribution to help stop greenhouse gases to be emitted into the air.

What is the difference between market failure and government failure?

Market Failure is an imperfection in the market mechanism that prevents optimal outcomes. It describes the condition where the allocation of goods and services by a market is not efficient. Government Failure is the public sector analogy to market failure. Government Failures Occurs when a government intervention causes a more inefficient allocation of goods and resources. A government failure is a non market failure. The main difference between these two is where a market failure is a problem to prevent the market from operating efficiently, and a government failure is a systemic problem which prevents an efficient government solution to a problem.

*Example:

Healthcare. The issue of healthcare is always in question. In the state of Massachusetts where until this year was voluntary by its residents to be covered by health insurance, now is mandatory by the state, where everyone needs to be enrolled in a plan by Dec.31st / 07 otherwise, you will not be able to receive your tax credit on your next filing year. This is an example of market failure because the government had to intervene, due to the cost