I’m pretty sure the concept of “opportunity cost” is covered in the first week of every introductory economics course. It forms the foundation of more complicated econ concepts. But it’s like we just completely forget about it after that first lecture. The concept is tragically underutilized in public discourse.
In case your econ 101 class was a long time ago (or you never took one), here’s how Wikipedia defines it:
So if you’ve got $100 to save, you could just stick it under your mattress. That course of action seems to cost you nothing. But the opportunity cost would be the interest that you would earn from putting it in the bank. Applying the concept is straightforward when both your inputs and outputs are measured in dollars (or shillings, or yuan, or whatever).
It gets a little more complicated when you have other factors involved. For example, suppose you’re choosing between cooking dinner or ordering delivery. Cooking dinner is usually cheaper, but it also takes more of your time and planning to have ingredients on hand. Your personal preferences matter too: I enjoy cooking, but you might find it frustrating.
Does it seem like I’m belaboring the point? Well, there’s a reason I am:
The aid discourse seems to have little grasp of opportunity costs.
Which is amazing considering that economists dominate this field. Of course, the choices are inherently harder in aid than in the rest of economics. Our outputs are rarely measured in dollars. It can be very hard to compare outputs within a given field (say, health: what’s the relative value of stopping HIV transmission to 10,000 people, versus providing treatment to 10,000 who are already HIV-positive?) and even harder to compare across fields (say, how do you compare educational outcomes versus health outcomes?).
But the one place we should have little trouble is with the inputs. Those are almost always denominated in dollars, or in something that can be converted to dollars. Yet when we talk about committing resources to a course of action, we rarely talk about how those resources might otherwise be spent. Let me give two examples.
Opportunity cost of SWEDOW — Stuff WE DOn’t Want.
Last year, the anonymous blogger J. offered the aid world a new term: SWEDOW. In the post where he introduced it, he described his frustration:
The standard SWEDOW scheme involves collecting a bunch of old, used items (shoes, bicycles, yoga mats, whatever), getting some donated money to cover shipping, and then distributing the items in an impoverished community somewhere overseas.
Although J. never used the term “opportunity cost” in his post, that’s how I’ve always thought about SWEDOW. The question we have to ask when evaluating any SWEDOW scheme is this: If we sold all of those used items and combined that with the cash donated for shipping, what would the community in question do with that money? Would they choose to buy the shoes/bicycles/etc. that we had been planning to ship there? Or would they rather have something else? That “something else” is the opportunity cost.
The fact that a recipient expresses gratitude for the free items is not enough to prove that this was the best use of the resources. Who’s going to turn down free stuff? Who’s going to say, “thanks for the bikes, but next time please fix the road”? If you offer me a free slice of pizza, I’ll probably eat it — despite the fact that I’m mildly lactose intolerant — because it’s there and it’s free. (This is not an exaggeration. I can’t turn down free food.)
Opportunity cost of stuff I DO want
Not every scheme involves sending things we don’t want. Apparently there is now a plan to send something that I would love to have: an iPad.
This morning, Wayan Vota commented on a proposal to send a “School in a Box” (SIAB) to rural schools in Zimbabwe. The box (shown at right) comes complete with an iPad 2, solar charging panel, speakers, projector and more.
There are two points to make in response to this idea. Vota makes the first point:
In other words, this isn’t a school. It’s just a box. An awesome box. But a box nonetheless.
The second point is to think about opportunity cost. The SIAB site hilariously compares the cost of the box to the cost of an Interactive Whiteboard, as if that were the alternative to this package. SIAB has a per unit cost of about €1200 — or $1600. I was curious if this whole thing would only be $1600 so I did a little back-of-the-envelope calculation. I came up with $1440 for just the parts. (The cheapest version of the iPad 2 costs $500; another SIAB document says the solar power system costs $390; the projector shown on their website costs at least $270; the speakers shown will cost about $30; the case shown with padded dividers would be another $250.) That leaves $160/unit for things like overhead, distribution, training and maintenance.
The opportunity cost question is this: What else could we do with $1600? Suppose we just limit ourselves to education in rural Zimbabwe. How else might we use $1600 to benefit Zimbabwean kids in a rural school? Well, we could hire them another teacher. Teachers in Zimbabwe make $220/month. At that rate, SIAB would be worth just over 7 months of a teacher’s salary. However, $220/month is well below the poverty line in Zimbabwe, which is why the country suffers from a shortage of teachers. For the past two years, the government has been asking parents to make up the salary difference with monthly payments to teachers. Such direct payments are not only unfair to poor parents, but they also warp the incentives for teachers. Clearly, there are other needs in Zimbabwe’s education system.
Zimbabwe isn’t the only country under consideration for SIAB. The politics and economics will vary by location. Yet I still feel pretty confident stating that in most developing country education systems, you can find a better use of $1600. The problem is that if you get enamored with the idea of an iPad in a box, you forget to look for those other uses. You forget to look for the opportunity cost. It’s the same thing that happens when you decide to donate old shoes, but it’s a lot more expensive with Apple products.