Trade-Offs and Opportunity Costs

Definitions of Opportunity Cost From the book: the most desirable alternative given up as a result of a decision The Hess definition: the benefits of your second choice that you give up when you go with your first choice

Why Opportunity Cost Matters Every trade-off involves an opportunity cost. You want the opportunity cost to be low. High opportunity cost = greater than the benefits of the first choice Therefore, you made the wrong choice. Low opportunity cost = less than the benefits of the first choice Therefore, you made the best choice.

Case #1: Why are infants on airplanes allowed in laps and not required to be in car seats? Without law: You choose to be safe and buy an extra seat for the car seat rather than hold the infant on your lap. Opportunity cost = the money you would have saved by holding the infant on your lap (the cost of 1 ticket) Some already consider this a high opportunity cost, given that the chosen option only increases safety so much. These people choose not to put their infants in car seats, causing some others to want this to be illegal.

Case #1, cont. With law: If you fly, you purchase an extra seat for the car seat rather than drive to your destination. Opportunity cost = money you would save by driving (the cost of tickets for the whole family) Many consider this an extremely high opportunity cost, despite the time saved by flying. Therefore, the law inadvertently increases the opportunity cost of flying with the infant in a car seat. This causes more infants to be in cars, where they are more likely to be in an accident, thereby defeating the purpose of the law.

Case #2: Why does safer equipment in cars not lead to fewer casualties? Without safer equipment (air bags, antilock brakes, etc.): You choose to drive safely rather than aggressively. Opportunity cost = time saved by driving aggressively (plus thrill?) Many people consider this a low opportunity cost, given the considerable difference in safety. These people choose to drive safely.

Case #2, cont. With today’s safer equipment: You choose to drive safely rather than aggressively. Opportunity cost = time saved by driving aggressively (same as before) Now more people consider this to be a high opportunity cost, given that there is less of a difference in safety. Therefore, safer equipment actually leads more people drive aggressively, and leads to more accidents and more casualties.

Conclusion: In order to change people’s behavior, you must: Lower the opportunity cost of the desired behavior, or Raise the opportunity cost of the undesired behavior.