Dismal economists don’t understand opportunity cost

Only 22 percent of American professional economists understand the idea of opportunity cost. This is the conclusion of a study of 200 economists attending the 2005 annual meetings of the American Economic Association. They were asked this:

You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?
(a) $0;  (b) $10; (c) $40; or (d) $50.

Not sure of the answer? What would you gain from seeing Dylan?  You value it at $50, and it would cost you $40.  So the net benefit to you of seeing Dylan is $10.  That is the opportunity cost to you of seeing Clapton.

Among the economists at the AEA, the answers given were:

Answer   Value  
Respondents   Percent  
A $0 50 25.1%
B $10 43 21.6%
C $40 51 25.5%
D $50 55 27.6%

 

The distribution of answers looks fairly random, though it is shaming to see that the correct answer was the least popular.

There are perhaps four concepts in economics that really, really matter, namely:

a. marginalism

b. opportunity cost

c. comparative advantage; and 

d. efficient markets.

As a government economist, the notion of opportunity cost was my bread and butter, the reason for my daily existence. If academic economists no longer understand the idea, what are they teaching the next generation of economists?

(via Robert Frank in the New York Times

One comment on “Dismal economists don’t understand opportunity cost”

  1. Have a look at Marginal Revolution for an interesting take on this. Is opportunity cost gross or nett?

    Owen replies: Tim: thanks. I am bemused by Tyler Cowen’s take on opportunity cost. As far as I can see, his point is a semantic one. He wishes that opportunity cost were defined as gross benefits, net of costs. But (a) that isn’t how the term is defined and used in economics; and (b) ‘gross opportunity cost’ would not be a useful measure of anything. Opportunity cost, as conventionally defined, tells us something we need to know: namely, what are we giving up in order to pursue this course of action? Measuring this as a gross concept just isn’t useful.

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Owen Barder

Owen is Senior Fellow and Director for Europe at the Center for Global Development and a Visiting Professor in Practice at the London School of Economics. Owen was a civil servant for a quarter of a century, working in Number 10, the Treasury and the Department for International Development. Owen hosts the Development Drums podcast, and is the author Running for Fitness, the book and website. Owen is on Twitter and