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• Foreword
• Preface
• Acknowlegments
• Cost and Choice
• 1.: Cost In Economic Theory
• Classical Economics
• Marginal-utility Economics
• The Marshallian Synthesis
• Frank Knight and American Neoclassical Paradigms
• 2.: The Origins and Development of a London Tradition
• Wicksteed and the Calculus of Choice
• H. J. Davenport
• Knight On Cost As Valuation
• Robbins, 1934
• Mises, Robbins, and Hayek On Calculation In a Socialist Economy
• Hayek, Mises, and Subjectivist Economics
• The Practical Relevance of Opportunity Cost: Coase, 1938
• G. F. Thirlby and “the Ruler”
• Mises’ Human Action
• The Death of a Tradition?
• Appendix to Chapter 2: Shackle On Decision
• 3.: Cost and Choice
• The Predictive Science of Economics
• Cost In the Predictive Theory
• Cost In a Theory of Choice
• Choice-influencing and Choice-influenced Cost
• Opportunity Cost and Real Cost
• The Subjectivity of Sunk Costs
• Cost and Equilibrium
• 4.: The Cost of Public Goods
• The Theory of Tax Incidence
• Costs and Fiscal Decision-making: the Democratic Model
• Costs and Decision-making: the Authoritarian Model
• Costs and Decision-making: Mixed Models
• The Choice Among Projects
• The Costs of Debt-financed Public Goods
• Ricardo’s Equivalence Theorem
• Tax Capitalization
• 5.: Private and Social Cost
• Summary Analysis
• A Closer Look
• Internal Costs, Equilibrium, and Quasi-rents
• An Illustrative Example
• Pigovian Economics and Christian Ethics
• Narrow Self-interest and Alternative-opportunity Quasi-rents
• Conclusion
• 6.: Cost Without Markets
• Prices, Costs, and Market Equilibrium
• Resource-service Prices As Final-product Costs
• Market Equilibrium, Costs, and Quasi-rents
• The Cost of Military Manpower: an Example
• The Cost of Crime: Another Example
• Artificial Choice-making
• Socialist Calculation and Socialist Choice
• Costs In Bureaucratic Choice

Opportunity Cost and Real Cost

Strictly speaking, only choice-influencing cost represents an evaluation of sacrificed “opportunities.” It might therefore be reasonable to limit the term opportunity cost to this conception and to invent other descriptive appellations to refer both to choice-influenced cost in a logic of choice and to the objective cost of the predictive theory. In a more general sense, however, any one of the three conceptions may be meaningfully treated in opportunity-cost terms. In the orthodox price-theory conception where cost is measured objectively by money outlays, it is helpful, for explanatory purposes, to equate these outlays to the values that members of society place on the alternate end products that might have been produced by the same outlays differently directed. In a certain ambiguous sense, therefore, cost here does reflect “opportunities lost.” But it is noteworthy that the “opportunities lost” in this context more accurately reflect the value of potential alternatives as judged by others rather than by the chooser himself.

The notion of “opportunities lost” can also be applied to the results of choice, or to choice-influenced cost. Here the concept is tied to the choice and the opportunities represent those things that “might have been,” as these are viewed after decision has been made. Given this hindsight, alternatives can be viewed differently than they were viewed before a commitment was made. Within a before-choice, or choice-influencing context, the opportunities lost are those that “might be,” as considered and evaluated at the moment of choice itself and as reflected in the presently anticipated value of utility losses expected to be incurred. Within the post-choice or choice-influenced context, by comparison, the opportunities lost are those that might have been enjoyed, as these are reflected in experienced utility losses or sacrifices. There can be an important psychological difference in the utility losses involved in choice-influencing and in choice-influenced cost. At the moment of choice itself, cost is the chooser’s evaluation of the anticipated enjoyments that he must give up once commitment is made; it is also that which he can avoid by choosing another alternative. Cost in this setting must be and remain a purely mental event. The chooser’s utility is reduced only in the sense that it is functionally dependent on expected utility in post-decision time periods. After the choice is made, cost may still reflect the evaluation of enjoyments that were sacrificed and cost remains a mental event, but there is more to it than this. Among the experiences that might have been avoided may be those requiring an explicit submission to pain, to suffering, to deprivation, in some physically relevant meaning of the terms. Having made a charge-account commitment, the buyer must pay his bills when they come due. Despite his possibly rational anticipation of this cost at the moment of choice, he still suffers pain when these bills must be met. This purely physical exposure to negative choice-determined effects enters into his subjective evaluation of the alternative that might have been. In a certain sense, therefore, the nature of cost is different in the choice-influencing and the choice-influenced contexts, although both remain in utility space.

So long as we treat cost in either a cost-influencing or a choice-influenced sense, that is to say, so long as we remain with the theory of choice itself, we are closer to the classical notion of real cost than is the neoclassical conception. Either as an obstacle to choice or as an undesirable consequence of choice, cost represents utility loss. In relatively sharp contrast, when cost is divorced from the choice process, as in the neoclassical predictive setting, there is nothing “real” about it. No pain, suffering, or utility loss is involved. This seems to have been the basis for Knight’s conceptual distinction between opportunity cost and real cost which led him to say that “... all references to ’sacrifices’ (should be) simply omitted.”1

[1. ]F. H. Knight, “A Suggestion for Simplifying the Statement of the General Theory of Price,” Journal of Political Economy, XXXVI (June 1928), 355.