Front Page Titles (by Subject) Resource-Service Prices as Final-Product Costs - Cost and Choice: An Inquiry in Economic Theory, Vol. 6 of the Collected Works
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Resource-Service Prices as Final-Product Costs - James M. Buchanan, Cost and Choice: An Inquiry in Economic Theory, Vol. 6 of the Collected Works 
The Collected Works of James M. Buchanan, Foreword by Geoffrey Brennan, Hartmut Kliemt, and Robert D. Tollison, 20 vols. (Indianapolis: Liberty Fund, 1999-2002). Vol. 6 Cost and Choice: An Inquiry in Economic Theory.
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Resource-Service Prices as Final-Product Costs
Final goods are not available in fixed quantities, however, and with the introduction of resource services, the objectivity of cost tends to be reintroduced. Prices for productive services are established in a market process, and these, like the prices for final goods, are empirically observable. These resource-service prices are derived from the evaluations placed on final products, which are acknowledged to be based on subjective elements. But the whole market acts to establish observable prices, and these prices, in turn, seem to make the costs of final products objectively real. The costs of production as faced by producing firms are also the prices of resource units as received by supplying agents. For final-product markets, therefore, supply-side adjustments seem to offer an escape from the logic into empirical reality. Suppliers act so as to bring costs into equality with prices; costs represent the marginal evaluations of foregone alternatives as expressed by the whole market and as expressed in money terms. For the prices of final products at least, we seem to be back in the quasi-classical world of one-way causality.
Even in full market equilibrium, however, the objectivity of opportunity cost is only apparent. As Frank Knight correctly indicated in his 1934 and 1935 papers, even in full equilibrium, resource-service prices reflect costs only if nonpecuniary advantages or disadvantages are absent from the choices of resource-supplying agents. If pecuniary returns provide the sole motivation for resource suppliers, the observed price for a resource unit does represent the choice-influencing opportunity cost of that unit, even if indirectly. If, on the other hand, nonpecuniary elements are present in the decisions of resource suppliers, the choice-influencing cost of the resource units is not observable in money prices paid for resources. The apparent linkage between final-product cost, in some objective sense, and observed prices paid for resource services disappears.
This does not, of course, affect the standard analysis of market interaction, and it does nothing to modify the welfare inferences that may be drawn from an understanding of competitive adjustment. So long as individuals on either side of the market are allowed to express their preferences by continuous adjustments in behavior, nonpecuniary elements will be fully embodied in the solution that emerges. Prices will tend to equal marginal opportunity costs. What is destroyed by the presence of nonpecuniary elements in choice is the spurious objectivity of costs, as measured by prices of resource services.
These prices may embody nonpecuniary elements, however, for only some resource suppliers, and not necessarily for all. If there exist a sufficient number of suppliers who are on the margin of indifference among all employments yielding equivalent pecuniary returns, resource-service prices accurately represent marginal opportunity costs despite inframarginal suppliers who are known to choose on the basis of nonpecuniary as well as pecuniary rewards. Inframarginally, nonpecuniary elements in choice do not affect the relationship between observed resource-service prices and marginal costs of final products. This applies only to marginal costs, however; average costs will not be accurately measured by observed outlays on resource inputs. Even if nonpecuniary elements are not present in effective choices made at the margin of adjustment and, hence, are not included in marginal opportunity costs, the presence of nonpecuniary elements in choices made over inframarginal ranges of supply ensures that observed outlays will not measure total costs. This does not modify the allocative results of the market interaction process, but it does mean that the use of predicted or observed outlays to measure total costs—costs which are to be compared with expected benefits as a basis for making nonmarket allocative decisions—can lead to serious error.