Economics Dictionary of ArgumentsHome
| |||
|
| |||
| Costs: In economics, costs represent the resources or sacrifices incurred to produce goods or services. These include explicit costs (direct expenses like wages, materials) and implicit costs (opportunity costs, such as foregone alternatives). Costs influence production decisions, pricing strategies, and overall economic efficiency, essential in assessing profitability and resource allocation._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
| Author | Concept | Summary/Quotes | Sources |
|---|---|---|---|
|
James M. Buchanan on Costs - Dictionary of Arguments
Boudreaux I 29 Def Cost/Buchanan: Boudreaux/Holcombe: „Cost is that which the decision-taker sacrifices or gives up when he makes a choice.“(1) Boudreaux/Holcombe: Cost is, as Buchanan explains in the above quotation, the direct result of making a choice. When someone makes a choice, that person incurs a cost in the form of the value, to him or her, of what he or she forgoes as a result of making that choice. >Opportunity cost. Boudreaux I 30 Cost is subjective. One person might choose to spend the money to watch the movie while another might decide that having lunch at a restaurant would yield more satisfaction. In making these assessments, both individuals could be correct, but there’s no way to know for sure. Individuals know how satisfied they are with the choices they actually make, but they can only guess about how satisfied they would have been had they chosen differently. Decisions: If someone is in a situation in which he or she has no choice, then no cost is incurred, because that person is giving nothing up. Boudreaux I 31 Regardless of the reason, because costs are subjective, there is no way for an outside observer to say which is the better option. Observability: Because each cost is the subjectively experienced value of a forgone alternative when a choice is made, costs are difficult to perceive. This is true even for the chooser. The person watching the movie experiences the pleasure of seeing it, but that person does not experience the pleasure that would have come from eating the forgone lunch. >Observability, >Tariffs. Boudreaux I 32 While all choices have costs, to insist on the reality and recognition of costs does not, of course, argue against actions that have costs. To do so would be also to argue against actions that have benefits. Inaction itself has costs— namely, the forgone benefits that would otherwise have been enjoyed by taking action. But the inescapable reality of scarcity means that if our well-being is to be enhanced rather than lessened, we should strive to act only in ways that yield benefits greater than costs. To the extent that we succeed in this endeavor, our well-being improves. We benefit on net. We benefit on net not by avoiding costs, which is impossible, but by choosing actions that we anticipate will yield benefits greater than costs. James Buchanan insisted that the common practice, even among modern economists, of reckoning costs in physical or monetary terms or - as some older economists did - in terms of “pain,” is often misleading. In his 1969 book Cost and Choice(1) , which separates him most radically from mainstream economists of his day, Buchanan argued that costs are purely subjective, unmeasurable, encountered only by individuals rather than by groups, and exist only at the moment of choice. Time/Buchanan: „Only at the moment of choice is cost able to modify behavior.“(1) >Decision-making process/Buchanan. Boudreaux I 33 „Costs that are influential for behavior do not exist; they are never realized; they cannot be measured after the fact.“ (Buchanan, 1969(1): vii) Subjective cost: In short, costs are the consequence of making choices. Costs are the chooser’s anticipated benefits of the alternatives that are sacrificed. These anticipated benefits exist only in the mind of the chooser; they cannot be seen or otherwise sensed by outside observers. Costs are subjective, not objective. And not being objective means that costs are not measurable on some external scale as, say, is someone’s height or weight and, hence, cannot be determined objectively. Boudreaux I 34 Individuals: Because only individuals make choices, only individuals experience costs, and then only those individuals who make the choices that yield the costs. Here’s Buchanan’s own summary of the implications of what he calls a “choice-bound conception of cost”: 1) Most importantly, cost must be borne exclusively by the decision-maker; it is not possible for cost to be shifted to or imposed on others. 2) Cost is subjective; it exists in the mind of the decision-maker and nowhere else. 3) Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept. 4) Cost can never be realized because of the fact of choice itself: that which is given up cannot be enjoyed. 5) Cost cannot be measured by someone other than the decision-maker because there is no way that subjective experience can be directly observed. 6) Finally, cost can be dated at the moment of decision or choice. (Buchanan, 1969(1): 43) Cf. >Social welfare/Buchanan. Boudreaux I 36 Costs of choices: The obvious impact that our choices have on others as well as on our future selves led Buchanan to distinguish between “choice-influencing costs” and “choice-influenced costs.” Choice-influencing costs operate at the moment of choice in each decision-maker’s mind, leading that decision-maker to choose one option over another. Choice-influenced costs are existing constraints that were created by choices made in the past. >Decision-making process/Buchanan. All costs that influence choices are anticipations of imagined forgone benefits; such costs are not the actual experiences that the chooser later encounters as a result of having made the choice. Unlike choice-influencing costs, choice-influenced costs can fall not only on the chooser but also on other persons. Boudreaux I 37 To the extent that a decision-maker accurately accounts for future consequences, the choice made now will lead to fewer “regrettable” choices having to be made later by him and by other individuals. 1.James M. Buchanan. (1969). Cost and Choice: An Inquiry In Economic Theory University of Chicago Press. - - - Parisi I 204 Costs/Buchanan/constitions/constitutional economics/Voigt: Deviations from the unanimity principle could occur during a decision process on the production of collective goods, but this would only be within the realm of the Buchanan model as long as the constitution itself provided for a decision rule below unanimity. Deviations from the unanimity rule would have to be based on a provision that was brought about unanimously. It is exactly this idea that is developed in more detail in the Calculus of Consent (Buchanan and Tullock, 1962)(1). There, Buchanan and Tullock are interested in the choice of decision-making rules and introduce three cost categories to make this choice subject to a rational calculation. 1) External costs are those costs the individual expects to bear as a result of the actions of others over which he or she has no direct control. Less inclusive decision rules are expected to cause higher external costs. At the limit, when a single individual makes binding decisions for the entire society, they will reach their maximum. 2) (…) decision-making costs, which the individual expects to incur as a result of the individual's own participation in an organized activity. These costs include only the estimated costs of participating in decisions when the agreement of two or more individuals is required. These costs are assumed to be increasing with inclusion. In other words: the higher the required majority to get to a decision, the higher the decision-making costs. There is, hence, a trade-off because it is impossible to minimize external and decision-making costs simultaneously. Buchanan and Tullock deal with the trade-off by summing up these two cost categories into a third category, 3) the costs of social interdependency, or simply interdependence costs. For purely private activities, these will be zero. According to Buchanan and Tullock, a rational individual confronted with questions of constitutional choice will opt for their minimization. The minimum of the interdependence costs will depend on the policy area considered. This implies that different policy areas should be Parisi I 205 endowed with different majority requirements. The majority requirements will, in turn, be agreed upon unanimously. >Consent/Constitutional economics, >Efficiency/constitutional economics, >Governmental structures/Constitutional economics. 1. Buchanan, J. M. and G. Tullock (1962). The Calculus of Consent - Logical Foundations of Constitutional Democracy. Ann Arbor, MI: University of Michigan Press. Voigt, Stefan. “Constitutional Economics and the Law”. In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconBuchan I James M. Buchanan Politics as Public Choice Carmel, IN 2000 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 Parisi I Francesco Parisi (Ed) The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017 |
||
Authors A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Concepts A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
