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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

Market Equilibrium, Costs, and Quasi-Rents

In the absence of nonpecuniary elements in resource suppliers’ choices, observed outlays on resource services would seem to provide an objective, even if indirect, measurement of the choice-influencing opportunity costs to these suppliers if the system is in full competitive equilibrium. The conditions for equilibrium that are required in this context are, however, much more severe than those that are necessary for other purposes. All resource suppliers must be on a margin of indifference among alternative employments; quasi-rents cannot be present. If some resource units earn quasi-rents, observed outlays on resource services will not accurately reflect the choice-influencing costs of resource owners with regard to the interoccupational or interindustry choices.

Resource-service prices are set at the appropriate margins of employment, and competition among purchasers causes similar units to earn similar returns. Similarity in internal or intraindustry productivity does not, however, imply similarity in alternative employment or interindustry productivity. Resources may be differentially specialized to particular industries. When this happens, quasi-rents emerge. The existence of such quasi-rents does not, of course, violate the logic of market interaction. In equilibrium, prices will be equal to costs, but costs must be tied to the particular decisions that are made. In selling his services to a single firm within a competitive industry, the resource owner foregoes a return that he might secure from any other firm in the same industry. Quasi-rents are not present in this situation since the resource owner is indifferent among employment by different firms. However, the choice of employment within the industry generally, as against other industries, may take place in the presence of quasi-rents. The foregone earnings outside the industry may fall short of those that may be secured from any single firm within the industry. Prices will, therefore, be equal to the costs that inform within-industry choices. For all except the marginal supplier, however, the prices paid for resource services—the outlays—will exceed the marginal evaluation of prospective alternative returns foregone outside the industry, even in full market equilibrium.

The existence of such inframarginal quasi-rents does not modify allocative outcomes of the market process because these quasi-rents disappear at the margin. For both an interfirm and an interindustry decision, the marginal resource supplier is in full equilibrium. Observed outlay made to him by the firm accurately measures his evaluation of foregone alternatives. The receipt of quasi-rents by inframarginal suppliers was the subject of a major debate a half-century ago, and one of the contributions of Allyn Young was that of showing the irrelevance of these for allocative efficiency.

Problems do emerge, however, when any attempt is made to utilize the properties of the market process as guidelines or norms for the making of nonmarket decisions. In this extension, the relationship between inframarginal quasi-rents and “costs” must be kept in mind.