The cost of another choice

Choosing how to use a limited resource involves more than calculating the money spent. Economists also consider opportunity cost: the value of the best alternative that is given up. This cost may be substantial even when no payment occurs.

Suppose a university has a vacant room suitable for either a rehearsal studio or a seminar room. Converting it into a studio requires little construction, but the decision prevents the room from hosting seminars. If seminars would otherwise need expensive rented space, the studio has a significant opportunity cost despite its low construction cost. The comparison should concern the most valuable realistic alternative, rather than the combined value of every imaginable use.

Opportunity cost can also change over time. While several seminar rooms are empty, assigning one room to rehearsals may require little sacrifice. During a period of high enrollment, however, the same decision may displace classes into rented rooms. A resource that appears inexpensive to use in one situation can therefore become costly in another.

This reasoning does not imply that the studio should be rejected. Rehearsals may provide benefits that justify the sacrificed alternative. Instead, identifying opportunity cost makes the comparison more complete: a decision should reflect both its direct expenses and the value of what it prevents.