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Social Studies skills: Difference between revisions
→Opportunity Cost
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===Opportunity Cost=== | ===Opportunity Cost=== | ||
* Definition: The value of the next best choice one had when making a decision. | * Definition: The value of the next best choice one had when making a decision. | ||
** i.e., the trade-off of a decision. | ** i.e., the trade-off of a decision. | ||
** Opportunity cost is a way of measuring your decisions: if I do this, would having done something else been more or less expensive? What did I give up in my decision? | ** Opportunity cost is a way of measuring your decisions: if I do this, would having done something else been more or less expensive? What did I give up in my decision? | ||
** Examples: | * Frederic Bastiat developed the "Parable of the broken window" to express the concept | ||
** from his essay, "''Ce qu'on voit et ce qu'on ne voit pas"'' ("What is seen and what is not seen") | |||
** the parable discusses the "unseen" costs of fixing a broken window | |||
*** even though the broken window provides benefit to a "glazier" makes money fixing it | |||
*** the shopkeeper suffers the "unseen" costs of not being to do something else with that money | |||
*** additionally, the opporutnities to fix broken windows may create an "unintended consequence" of a "perverse incentive" for glaziers to go about breaking windows in order to make money fixing them | |||
click EXPAND for a review of Bastiat's theory of "opportunity cost" and associated concepts of "unintended consequences" and "perverse incentives" | |||
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* ''Parable of the broken window'': | |||
** a shopkeeper has a careless son breaks a window | |||
*** his neighbors argue that broken windows keep "glaziers" (window-makers) in business | |||
**** if it costs 6 francs to fix, they argue, the money spent on the window is productive, as it goes to the glaziers | |||
*** Bastiat replies that, yes, money has thus circulated, but "it takes no account of what is not seen" (''ce qu'on ne voit pas)'' | |||
**** the shopkeeper can't spend those 6 francs on something else of his choosing | |||
**** or, perhaps, he has another need for 6 francs that he can not now fix | |||
**** therefore the accident of the broken window prevents the shopkeeper from using his money more efficiently | |||
*** Bastiat writes, "Society loses the value of things which are uselessly destroyed" | |||
*** the parable also develops "the law of unintended consequences" | |||
**** ex.: if the glaziers figure out they can pay a boy 1 franc to break windows, and they can still make a profit at 5 francs per window, | |||
***** there will thereby exist a "perverse" incentive to break windows | |||
****** "perverse incentive" = an incentive that produces a negative outcome | |||
** economists have argued over the "opportunity costs" of | |||
*** disasters (hurricanes, earthquakes which require repair and thus create jobs & economic activity) | |||
*** wars (spur economic activity and mobilization) | |||
** however, whatever the benefit it does not account for Bastiat's "unseen" costs and cannot in any way outweigh the suffering, death and loss of choice created by the disaster or war | |||
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* Examples: | |||
** If you own land on an urban road, and you decide to build condos on it, what else might you have done, and what would that have cost -- or earned -- for you? | |||
* Questions: | |||
** If the U.S. imports oil from Saudi Arabia, is the U.S. giving up the potential of its own oil industry? | |||
** If Saudi Arabia relies on oil, what is the cost of that reliance? | |||
=== Herbert Stein's Law === | === Herbert Stein's Law === | ||