Worked example 1

A student chooses to study economics for an hour instead of working a part-time job paying £8. What is the opportunity cost?

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The £8 wage (or whatever could have been earned) — the next best alternative forgone.

If leisure was valued more than £8, the OC of studying might be that leisure.

Worked example 2

A government has a budget of $500 million and is considering three projects:

Project A: A new hospital costing $500 million with an estimated social return of $700 million.
Project B: A new high-speed rail link costing $450 million with an estimated economic return of $600 million.
Project C: A nationwide school upgrade program costing $480 million with an estimated social return of $650 million.

The government chooses to fund the new hospital (Project A). Calculate the opportunity cost of this decision.

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Identify the choice made: The government chose Project A, the hospital.
Identify the forgone alternatives: Since the budget is $500 million, the government could have afforded either Project B or Project C instead.
Determine the 'next best' alternative: To find the next best alternative, we compare the benefits of the forgone options.
- Project B (Rail Link) has an expected return of $600 million.
- Project C (School Upgrades) has an expected return of $650 million.
Compare the alternatives: The school upgrade program (Project C) has a higher expected return ($650m) than the rail link ($600m). Therefore, Project C is the next best alternative.
State the Opportunity Cost: The opportunity cost is the value of the next best alternative forgone. In this case, it is the benefit that would have been gained from the school upgrade program.

Final Answer: The opportunity cost of building the hospital is the $650 million in social returns from the forgone school upgrade program.