Trade-Offs and Opportunity Costs

1. Trade-Offs and Opportunity Costs

2. 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

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.