Opportunity cost and its significance in economics

[arafay]

few people in the world understand economics but in pakistan even basic economic ideas are not understood by the common people let alone political leaders.

human wants and desires are unlimited. we all want big cars, big houses, lavish food etc. however, there arent enough resources available in the world to provide this lifestyle to all 6 billion+ people in the world. therefore, trade offs are required to manage the economy of country due to the limited resources available. Good economic management is the science of using limited resources to benefit the maximum number of people for as long as possible.

for any investment made in a public project, there is the investment cost, running and maintenance costs we all know about. However, there is another cost associated with any investment which few people discuss - the opportunity cost. Simply put, opportunity cost is the value of the next best alternative available to the project being considered.

for eg, a govt has 100 billion development budget and they have proposals of 25 different projects with a total cost of 150 billion. so the govt has to pick and choose and thus a trade off is involved. it selects 15 projects and dismisses the other 10 projects. the opportunity cost of the 15 projects is the value of 10 projects dismissed.

now imagine if the value of the 10 projects dismissed is 200 billion meaning that when completed these 10 projects will add/save 200 billion for the government. This means the opportunity cost of the 15 projects that govt accepted was 200 billion. the total economic cost of the 15 projects therefore is not 100 billion but 100 + 200 = 300 billion + running cost.

the lahore metro bus project cost punjab govt 30 billion. what other alternative projects could be done for this money is the opportunity cost for metro bus. now we have islamabad/pindi metro bus project costing over 50 billion. let's forget subsidy and maintenance costs for now and focus on the opportunity cost. so now that is a total of 80 billion rupees gone on 2 transport projects. what do you think is the opportunity cost of this investment?

note: 80 billion is approx 800 million USD which is almost equal to the total foreign direct investment in this financial year.

 

[TylerDurden]

We are talking over 200 Billion as the overall cost which as per your case based on fair morality, no fraud and kick backs.

Add it all up, this will go over 500 or more ... but then again this is not the point i was trying to make because you already summed it up very well.

I looked at this from another perspective which is called PIE DISTRIBUTION ECONOMIC MODEL.

Imagine our current total spending like an apple pie which is contracting after every fiscal year. Our institutions, civil and others are bound to take their %age contribution from this ever contracting pie, not considering the fact that more bigger the pie (More money this country has) more bigger piece of the pie they can take. Its like public limited company where the public ripped it off by the end of the year and everyone becomes so wealthy.

Our pie is contracting ... their %ages are getting bigger ... public is becoming defaulters.

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[arafay]

wese tu kisi ne mere baat ka jawab nahi diye lekin mene ek project identify kiya punjab se jiska ke liye sirf 50-60 billion required thay lekin govt ne puray paisay nahi diye.

is project ka name ha neelum jehlum

[h=1]Neelum-Jhelum project may be further delayed, faces Rs50bn shortage[/h]http://www.dawn.com/news/1162472

ager ye project complete hojai tu approximate 1000 MW electricty produce hogi