Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance or an Arbitrary Concept?

• Published in: Southern economic journal 2012-10, Vol.79 (2), p.248-256
• Main Authors: Potter, Joel, Sanders, Shane
• Format: Article
• Language: English
• Subjects: A20; Accounting methods; Cost (Economics); Cost accounting; Cost benefit analysis; D01; Economic benefits; Economic costs; Economic costs and benefits; Economic methodology; Economic performance; Economic surveys; Economic theory; Economics; Economics education; Economists; Forecasts and trends; Interviews; Marginal analysis; Market prices; Methods; Microeconomics; Opportunity cost; Opportunity costs; Pedagogy; Resale value; Shadow prices; Studies; Textbooks; Willingness to pay
• ISSN: 0038-4038; 2325-8012
• DOI: 10.4284/0038-4038-2011.218

Ferraro and Taylor (2005) asked 199 professional economists a multiple-choice question about opportunity cost. Given that only 21.6% answered "correctly," they conclude that professional understanding of the concept is "dismal." We challenge this critique of the profession. Specifically, we allow for alternative opportunity cost accounting methodologies—one of which is derived from the term's definition as found in Ferraro and Taylor— and rely on the conventional relationship between willingness to pay and substitute goods to demonstrate that every answer to the multiple-choice question is defensible. The Ferraro and Taylor survey question suggests difficulties in framing an opportunity cost accounting question, as well as a lack of coordination in opportunity cost accounting methodology. In scope and logic, we conclude that the survey question does not, however, succeed in measuring professional understanding of opportunity cost. A discussion follows as to the concept's appropriate role in the classroom.