I first encountered the idea of opportunity costs when I read Frédéric Bastiat’s “That Which is Seen, and That Which is Not Seen”(1), an absolute must read for all students for economics or law. Bastiat brilliantly dismantles the idea of what he calls “The Broken Window Fallacy”(2): the idea that the destruction of a window benefits society because of the resources and work opportunities necessary to replace it. Using the concept of opportunity costs (although Bastiat didn’t call it that), the French economist explains that by investing the funds necessary to replace this window, the person replacing it cannot spend those funds on an alternative of equal value. Maybe he would have spent more money during his vacation, maybe he would have bought another shirt.
“For every Yes there are a thousand No’s”
In every situation choosing one option comes at the cost of your next-best alternative. Once you realise that there are options which are mutually exclusive (for instance: you can only buy limited amounts of goods in store as your budget is limited), you’ll make more informed choices. That, in a nutshell, are opportunity costs. Let’s try to illustrate this with a personal story.
A few years ago a friend of mine was confronted with problems in her neighbourhood: the children of a family down the street wouldn’t stop playing loud music during the warm summer days, when many try to enjoy the sun in their backyards. Even though she had often tried to talk to the parents, none were able (or mostly willing) to intervene.
The opportunity costs of calling the police are pretty high. They require your time, the courage to deteriorate the relationship to your neighbours even more and are unlikely to be successful. After all, these were children, what was law enforcement going to do?
Counter-intuitive, but more efficient
My suggestion to my friend was counter-intuitive, but proved to be less costly and more efficient. Every Friday my friend would offer all the children from this house ice-cream. Vanilla, chocolate, all their favourite flavours were available every Friday upon a simple ring at the doorbell. The condition for this treat was simple: no loud music coming from down the street during the entire week.
Not only did the children refrain from playing music, they even self-regulated their younger siblings. If one of them decided to play music and would be responsible for the absence of delicious ice-cream on Friday, he or she would be criticised by its brothers and sisters.
Quite evidently, both choices were mutually exclusive: the choice was between confrontation or mutual agreement. Of course the ice-cream cost money, and swallowing your pride by offering free sweets to the children who had ruined quite a few of your afternoons came at a price as well, but compared to yelling at the children or even calling the police, it came at a lower cost and proved to be more effective. The trickiness of opportunity costs is that the best alternative cost is not necessarily the one you would choose intuitively, so in order solve problems like these, assess your resources and answer this basic question:
How much of my resources (money and time) will I be required to spend for the relative gain I expect to yield?
One simple assessment that might not only teach you the easiest economics lesson can receive, but it might also just solve the fight with your neighbour.
(1) “That Which is Seen, and That Which is Not Seen; by Frederic Bastiat.” http://bastiat.org/en/twisatwins.html. Accessed 19 Apr. 2017.
(2) “The Broken Window Fallacy — ThoughtCo.” 28 Mar. 2017, https://www.thoughtco.com/the-broken-window-fallacy-1147822. Accessed 19 Apr.. 2017.
This article was first published by Freedom Today.