David R. Henderson
The Concise Encyclopedia of Economics

Opportunity Cost

by David R. Henderson
About the Author
When economists refer to the "opportunity cost" of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.

The word opportunity in opportunity cost is actually redundant. The cost of using something is already the value of the highest-valued alternative use. But as contract lawyers and airplane pilots know, redundancy can be a virtue. In this case, its virtue is to remind us that the cost of using a resource arises from the value of what it could be used for instead.

This simple concept has powerful implications. It implies, for example, that even when governments subsidize college education, most students still pay more than half of the cost. Take a student who pays $2,000 in tuition at a state college. Assume that the government subsidy to the college amounts to $5,000 per student. It looks as if the cost is $7,000 and the student pays less than half. But looks are deceiving. The true cost is $7,000 plus the income the student forgoes by attending school rather than working. If the student could have earned $15,000 per year, then the true cost of the education is $7,000 plus $15,000. Of this $22,000 total, the student pays $17,000 ($15,000 plus $2,000).

What about the cost of room and board while attending school? This is not a true cost of attending school at all, because whether or not the student attends school, someone must pay room and board.

About the Author

David R. Henderson is the editor of this encyclopedia. He is a research fellow with Stanford University's Hoover Institution and an associate professor of economics at the Naval Postgraduate School in Monterey, California. He was formerly a senior economist with the President's Council of Economic Advisers.

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