A New Perspective
6. 6.1 Costs, supply and policy INTRODUCTION AND OVERVIEW Every national policy decision or choice involving the use of resources requires a consideration of costs, usually in terms of opportunity costs. Opportunity costs are measured by the value of alternatives forgone as a result of choosing one possibility rather than alternative possibilities. The relevant cost of choosing one alternative from a set of possible choices is the value of the best alternative forgone. The purpose of this chapter is to explain and illustrate policy applications of the concept of opportunity costs, to consider other cost concepts such as sunk costs, which are important for policy purposes, and to examine cost and supply relationships typically experienced by ﬁrms and industries and consider their implications for microeconomic policy. The discussion deals ﬁrst with the concept of opportunity costs and then illustrates how (private) opportunity costs are automatically taken into account by ﬁrms in a perfectly competitive market system. In some circumstances, this results in a Paretian optimum. But perfectly competitive markets can fail to achieve this result if marginal social opportunity costs diverge from the marginal private opportunity costs experienced by individual decision-makers (for example, ﬁrms), for instance as a result of environmental spillovers, as was illustrated in Chapter 2. This may call for government intervention in the operations of the economy. But as will be pointed out, governments and government bureaucrats may fail to take proper social account of marginal social opportunity costs. When government intervention is contemplated on the grounds...
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