Tuesday, May 11, 2010

Opportunity Cost: Transit Edition

Imagine a bus system of trivial expense that brings people to an otherwise unreachable neighborhood, where they spend $10 million a year. Does the region's economic activity grow by the full amount?

Only if we make the unrealistic assumption that these people would have spent zero otherwise (or chosen alternate activities with zero utility, if you want to think in terms of economic well-being instead of spending). Surely they would do something else with their time had the bus system not existed, and many of those something elses would involve spending money. This forgone spending must be substracted from the $10 million a year to calculate the marginal revenue of the bus system.

I don't mean to pick on transit advocates. But when we assess the value of something, it's important to remember the value of what's being given up and deduct accordingly. For a good overview of opportunity cost, see Frederic Bastiat's classic essay "What Is Seen and What Is Not Seen."