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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

Narrow Self-Interest and Alternative-Opportunity Quasi-Rents

The preceding section indicated that one means of rescuing the Pigovian policy logic lies in making the explicit assumption that no factor involving “regard for others” influences the choices of the person who exerts external costs. Even with this constraint on individual utility functions, however, conflicts between applications of the policy norms and efficiency criteria will arise if prospective “quasi-rents” exist for alternative courses of action. This can also be shown in terms of the simple illustrative example already discussed.

In the earlier use of the example, we assumed that no “profit” prospects exist for any other spending opportunities. In this case and only in this case will the expected money outlay on resource inputs, $100, reflect at all accurately the internal component of genuine opportunity costs, and the expected marginal tax, $45, the comparable externally imposed component. In such a model, the added assumption that the choosing-acting person places no evaluation on either the utility levels attained by others or the changes in these levels that are the results of his own behavior will restore the consistency between the Pigovian policy logic and overall efficiency norms. What we now must show is that, even if we retain the narrowly defined self-interest assumption about individual behavior, any relaxation of the assumption about “profits” or “quasi-rents” in alternative courses of action will undermine the whole policy apparatus.

Consider the situation where there are anticipated “profit” prospects in alternative spending opportunities. Suppose that in considering the purchase of the additional foxhound, from which I estimate a marginal benefit of $160, I expect the outlay on resource inputs measured at $100, but that I also anticipate that I could invest $100 in some other line of activity yielding an expected marginal benefit which I subjectively value at $115. In this case, $115, and not $100, is the figure that best represents my choice-influencing opportunity cost, the barrier to choice, before the imposition of the tax. Suppose now that the corrective tax of $45 is levied on the marginal purchase, and, as before, let us accept that this accurately reflects my neighbor’s own evaluation of the external damage that he will suffer from my action. It follows that “social costs”—those costs that must be borne by all members of the group and which are the result of the marginal choice—are best measured at $160. This figure reflects my own marginal opportunity costs, now measured at $115, plus the external costs borne by my neighbor, measured at $45. Because both the social costs and the social benefits of my acquiring another foxhound are measured at $160, the standard allocative norms suggest that I should be indifferent in the decision. Note, however, that this indifference will not be realized in my own choice calculus once the corrective tax is imposed on my marginal purchase. As I now confront the alternatives, my choice-influencing costs will be $166.75, not $160. Not only must I value the expected outlay on inputs in terms of the foregone alternatives, i.e., $115, but also, I must value the expected marginal tax outlay in terms of foregone alternatives which payment will make impossible to achieve. If the expected “profit” on the $100 outlay in an alternative course of action is $115, we should expect the choice-influencing costs of the expected $45 tax to be roughly $51.75. The choice is no longer marginal in my own decision calculus; the corrective tax has caused choice-influencing opportunity costs—private costs—to exceed marginal social costs. I shall overadjust my behavior, even considering the most restrictive self-interest arguments in my utility function.