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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

Prices, Costs, and Market Equilibrium

What are the relationships between “prices” and “costs” in full market equilibrium? For each participant, expected marginal benefit will be equal to marginal opportunity cost, both measured in terms of the individual’s subjective valuation. All persons are observed to confront uniform relative prices for goods; this is a necessary condition for the elimination of gains-from-trade. Since each participant is in full behavioral equilibrium, it follows that each person must confront the same marginal cost. As a demander, the individual adjusts his purchases to ensure that anticipated marginal benefit equals price. Hence, the anticipated marginal benefits of a good, measured in the numeraire, are equal for all demanders. As a supplier, the individual adjusts his sales to ensure that anticipated opportunities foregone, marginal opportunity cost, equals price. Hence, marginal opportunity cost, measured in the numeraire, is equal for all suppliers.

Prices tend to equal marginal opportunity costs in full market equilibrium. But costs here are fully analogous to marginal benefits on the demand side. Only prices have objective, empirical content; neither the marginal evaluations of the demanders nor the marginal costs of the suppliers (the marginal evaluations of foregone alternatives) can be employed as a basis for determining prices. The reason is that these are both brought into equality with prices by behavioral adjustments on both sides of the market. Prices are not brought into equality with some objectively determinable and empirically measurable phenomena, on either the demand or the supply side of the market.

In this elementary logic of the market process, we are back in the classical model for goods with fixed supply, the model that became the general one with the advent of the subjective-value theory. There is no “theory” of normal exchange value with positive content here. The analysis provides an “explanation” of results, a logic of interaction; it contains no predictive hypotheses.