H026
If your concert ticket was free, did going cost you anything?
Every choice has a price you never pay at the register: the best thing you gave up to make it. That price is so easy to miss that when 199 economists were asked to find it, fewer got it right than random guessing would.
A choice costs the best thing you give up. Going to Clapton means skipping Dylan. Seeing Dylan would have been worth $50 to you, but you'd have paid $40 for the ticket, so skipping him costs you the $10 of enjoyment beyond the ticket price. That's the cost of the “free” concert: $10. When this textbook question was given to 199 economists at their profession's 2005 annual meeting, only 21.6% chose $10. Each of the four answers drew about a quarter of the votes.
The rest of us mostly don't think about it at all. In one study, students were offered a $14.99 DVD. When the other option read “Not buy,” 75% bought it. When it read “Keep the $14.99 for other purchases,” only 55% did. Nothing changed but the reminder. A price tag shows what you pay; it doesn't show what you give up. Before saying yes, ask: what's the best thing I'd do instead?
Try it somewhere else
A free Saturday class is offered. Your next-best plan was a shift that pays $60.
What does the free class really cost you?
Why $10, step by step
List what you give up, not what you pay. Clapton's ticket is free and can't be sold, so it costs nothing to use, and selling it isn't an option you lose. The only thing you lose is the Dylan concert. Seeing Dylan would bring you $50 of enjoyment for a $40 ticket, a $10 gain. Giving up that gain is the cost of going to Clapton.
The wrong answers each count only part of the picture: $0 counts only the price of the free ticket; $40 counts the Dylan ticket you'd have bought, which you keep; and $50 forgets that seeing Dylan would have cost you $40.
Was it a fair question?
Some economists argued that the question is worded in a way that invites confusion, and that “opportunity cost” is defined slightly differently in different textbooks. In a 2014 follow-up, 21% of undergraduate economics students got the original question right, but 61% got the same problem right when it was rewritten without converting enjoyment into dollars. The idea is simple; counting the thing you didn't do is the hard part.
Related exhibits
Sources: Paul J. Ferraro and Laura O. Taylor, “Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science,” Contributions to Economic Analysis & Policy (2005): an introductory textbook question; 199 economists surveyed at the 2005 Allied Social Science Associations meetings; answers $0: 25.1%, $10: 21.6%, $40: 25.6%, $50: 27.6%. Shane Frederick and others, “Opportunity Cost Neglect,” Journal of Consumer Research (2009): 150 students, DVD purchases fell from 75% to 55%. Follow-up with students: Economics Bulletin, vol. 34, no. 3 (2014), pp. 1550–1556.