Opportunity Cost

In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity), or the most valuable forgone alternative (or highest-valued option forgone), i.e. the second best alternative.

An early representation of the concept of opportunity cost is the "broken window fallacy" illustrated by Frédéric Bastiat in 1850 in his essay "Ce qu'on voit et ce qu'on ne voit pas" (That Which Is Seen and That Which Is Unseen) to illuminate the notion of hidden costs (a.k.a. opportunity costs).

Bastiat uses this story to introduce a concept he calls the broken window fallacy, which is related to the law of unintended consequences, in that both involve an incomplete accounting for the consequences of an action. Economists of the Austrian School frequently cite this fallacy, and Henry Hazlitt devoted a chapter to it in his book Economics in One Lesson.

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

Bastiat's original parable of the broken window went like this:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Fallacy of the argument:
The fallacy of the onlookers' argument is that they considered only the positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper. As the shopkeeper was forced to spend his money on a new window, he obviously could not have spent it on something else. For example, the shopkeeper may have intended to replenish his inventory, but now cannot do so for he must fix his window. The lack of inventory may drive customers to a competing shopkeeper, who gains at the other's loss.

Further, the extent of the damage may have required the shopkeeper to close his business until the damage was repaired, costing him revenue while still having expenses for rent and utilities.

Thus, the child did not bring any net benefit to the town. Instead, he made the town poorer by at least the value of one window, if not more.


There you have it - Go figure...