Big HT2 Scott Sumner.
In a very good review of Tyler Cowen’s new book Create Your Own Economy (which I purchased but haven’t started to read yet) Sumner says in the comments (in reference to framing effects)
They remind me of a personal experience I had that I ask my class about. I bought a Springsteen ticket in 1978 for $10. As I was about to go in someone offered me $50. I ask people “what did it cost me to see the show?” Almost nobody says $50. Oddly, some people say $40. (They are also surprised by how cheap tickets were back then. It was a small show in a Chicago movie theatre. Very cozy. And in 1978 Springsteen was a very charismatic perrformer in an intimate setting.)
I understand the inclination to say the costs as $40. I posed this scenario to several non-economists and got an answer of either $10 or $40. Of course, $10 represents the sunk cost of the ticket and this is obvious. Once the ticket is purchased, there is no opportunity for resale and so no costs of opportunity. But the $40 profit represented by the scalper represents an opportunity cost: the potential gains foregone to pursue a preferred task. The total costs are, therefore, represented by the opportunity cost plus the sunk costs for a total of $50.
This is a confusing concept… why aren’t the sunk costs subtracted? Because the sunk cost (at least in this scenario) are non-refundable. I can’t can’t my initial $10 back, but forgoing the profit I could make from the ticket sale comes costs a $40 profit.
Of course, we must also consider non-monetary costs and benefits… If you consider a Springsteen concert experience more than even $50 in total costs. This makes opportunity costs different to express in real scales and on temporal scales. One commenter (known as “philo”) points this out on Sumner’s blog: opportunity costs are time scale relevant. Framing effects, available choices and preferences over a given time, are important.
Stay tooned: In my next post, I discuss opportunity costs further with fellow False Symmetry blogger, Robert Simione.