Human Choice Creates Opportunity Cost
Opportunity cost is fundamentally derived from human choices /decisions, not from goods involved or produced in a choice. Therefore, as long as you have made a choice, and as long as the choice still occupies resources, you will have an opportunity cost that is non-zero and positive. Do not believe any claim that opportunity cost is zero when there is a human choice with at least two options.
Occupied Resources Vs. Usage Based Sacrifice
The idea of opportunity cost is among the most fundamental in economics and all decision making sciences. To make decisions is to pick and choose from at least two options. I prefer to call opportunity cost “Occupied resources cost:” Resources taken or occupied for an option cannot be used for anything else simultaneously, or during the period they are occupied.
The occupied resources interpretation differs from usage based sacrifice interpretation. In the latter the implicit opportunity cost is limited to the cost of using already owned resources for a chosen project — resources that need no out-of-pocket spending now — while the explicit cost covers all quantifiable expenses recorded and reported in accounting bookkeeping. Although this leaves little room for mixing the two categories up, it brings a real danger of reporting zero opportunity cost when it actually exists.
Here is how the logic works: As long as there is no direct payment in current time, explicit opportunity cost will be zero. Similarly, as long as the resources have no other use at present, implicit opportunity cost will also be zero. Since opportunity cost is the sum total of implicit and explicit costs, we are left with no choice but to declare a zero opportunity cost. This is exactly what the Wikipedia article entitled “Opportunity Cost” said: “The opportunity cost of using a machine that is useless for any other purpose is nil, since its use requires no sacrifice of other opportunities.” But this represents a “goods-centered” view, which lets a particular property of the good (I.e., the machine) determine the existence of opportunity cost. It should be changed to a “decision-centered” thinking because opportunity cost is fundamentally derived from human choices /decisions. Every choice itself, not the goods involved in a choice, incurs opportunity cost as long as it occupies resources. To switch from good-centric to decision- or choice-centric, we must change from calendar time to choice time. The latter is reflected in the Generally Accepted Accounting Principles (GAAP) in business. More specifically, determining opportunity cost strictly by when the resources were owned and used goes against the GAAP in cost accounting, where historical cost from the past is not ignored in current period but is spread over to have a full cost of production in each period.
In contrast, the occupied resources opportunity cost does not stick to ordinary calendar but a “choice calendar,” which is in effect as long as resources are still occupied by a choice. From a choice /decision perspective, it is not the cost at one particular time that determines which option is the best to take. We must consider their total costs over time. Historical cost of acquiring the resources will not be ignored at current time, with or without additional spending for maintaining and/or expanding the resources now. This ensures explicit opportunity cost is not zero as long as a choice is in effect. By the time the decision was carried out to buy the machine at time t, In contrast, the occupied resources opportunity cost does not stick to ordinary calendar but a “choice calendar,” which is in effect as long as resources are still occupied by a choice. From a choice /decision perspective, it is not the cost at one particular time that determines which option is the best to take. We must consider their total costs over time. Historical cost of acquiring the resources will not be ignored at current time, with or without additional spending for maintaining and/or expanding the resources now. This ensures explicit opportunity cost is not zero as long as a choice is still in effect. By the time the decision was carried out to buy the machine at time t opportunity cost was already created — we do not wait to see if the machine can serve multiple purposes at time $latex s=t+i\,; \forall i>0$. But even the implicit cost of the single use machine is not zero. The fact that the machine is being used at a later time s tells us something we did not know at the earlier time t: There is an ongoing silent choice — the owner had the option to stop using the machine but chose not to. A silent choice is still choice, and bears opportunity cost just like an explicit choice does. Consider the benefit from removing the machine at time t, it would free up a space for other use, eliminate the man-hours on the machine maintenance and on training workers for its operation. Finally, replacing the old machine by a new one would bring higher returns. These potential benefits have all been ruled out by keeping the old machine in use.
Forced Choice & Opportunity Cost
Not only do silent choices have opportunity cost, but also forced choices. Let us consider a scenario of extreme scarcity such that there is only one machine available in the entire market. At first glance, this seems to demand no choice at all with zero opportunity cost. To be sure, such a reasoning implicitly — and unnecessarily — narrows down the range of choices to machines only: There are other ways to use time and money without any machines involved altogether. But to make a new point here, let us pretend that nothing else matters and we just want to consider machines. Even this narrow thinking, combined with extreme resource scarcity, will not drive away choices nor opportunity cost. It only generates forced choices because under extreme scarcity, agents want to grab the only machine available. Only one agent how- ever can get it and the rest are forced to take the option of “not buying it” or “buying it later”.
Yet forced choices are still choices and just like silent ones, they do bear opportunity cost. The opportunity cost for those not getting the machine is clearly larger than zero. What about the lucky one who did buy the machine, whose alternative option of not getting the machine seems to be worthless? Let us think the benefits of not buying. Agents do not have to worry about the financial, operational and mental risks involved with the machine. They also would have more freedom to use the “machine money” to buy anything else they desire. Buying the machine now would make all these benefits disappear, which exemplifies the occupied resources dilemma we discussed earlier.
Opportunity Cost of Abundant Resources
Finally, instead of extreme scarcity, let us consider the opposite case of abundant resources (e.g., air, water and sunshine) with presumably zero opportunity cost. Again, opportunity cost is not about any resources but only occupied resources — occupied by different human choices. Therefore, we are not interested in the opportunity cost of air, water or sunshine per se but what and how humans choose to do with these abundant resources. The minute we chose to burn coal for BBQ, a process called oxidation that relies on the oxygen in the air, we immediately created opportunity cost from not using the green grills to protect air quality. Similarly, the minute we decide to do something to improve water quality, we immediately face the trade-off of not doing something else in a different direction.
In sum, we have presented three extreme case scenarios to illustrate the ubiquitous existence of opportunity cost: When human choices are implicitly and silently made; when ex- treme scarcity forces agents to pick certain options and when resource abundance may ap- pear to make choices irrelevant. None of these will bring opportunity cost down to zero. As long as we have human choices that require designated resources at the same time when other choices are viable, we should expect positive opportunity cost.
The Heart and Soul of Opportunity Cost Is Implicit Cost
Explicit cost concerns the chosen option, and tends to stay the same with or without alternative. while