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Opportunity cost is widely considered to be a fundamental concept in economics. But the definition of the term continues to be both unclear and controversial. I describe how the term is widely used in two distinct ways, both in academic and non-academic contexts. I propose a practical way for educators to clarify the concept and related terminology.

A well-known survey of economists revealed that many of them could not correctly answer a basic question on the concept of opportunity cost. In this paper, I connect the concept of opportunity cost to the familiar apparatus of marginal analysis—the equality of prices and marginal rates of substitution at the margin. When opportunity cost is understood this way, it forces one to be clear about units and about the difference between discrete and continuous variables. A more general understanding of opportunity cost can link basic principles-level examples with more advanced technical examples and improve the stories that make up the rhetoric of basic economics instruction.

The resources available for the public provision of health care are not unlimited. Cost-effectiveness evidence on new healthcare interventions can help us prioritise in order to use scarce resources wisely, but to interpret cost-effectiveness evidence, it may appear as if we must make trade-offs between life and money. This is not so. If we are able to quantify the health improvements that resources would or could have generated in alternative use, a decision about providing or denying treatment can instead be framed as a trade-off between health gained and health forgone. In this thesis, I seek to provide a more robust basis for this way of reporting and interpreting cost-effectiveness evidence. In Chapter II, I discuss the definition of opportunity cost in economic evaluation. The opportunity cost of providing an intervention is what we must give up to provide it. More precisely, it is typically defined as the value of the best alternative forgone. In economic evaluation of health care, opportunity cost has been understood in terms of the least cost-effective, currently funded intervention, which should be displaced when funding new interventions subject to a fixed budget. I show that alternative uses forgone may be neither currently funded nor well-defined, which implies that we should not look to cost-effectiveness evidence on specific interventions for information on opportunity cost. Further, identifying a best alternative use assumes that priority setting is based on objectives that can be summarised into a single measure of value. If economic evaluation is used to inform trade-offs between one measure of value (e.g., quality-adjusted life years, QALYs) and other, unquantified objectives, I suggest that it would be more appropriate to define opportunity cost as value in expected alternative use. To quantify opportunity cost as health forgone, we need evidence on the health that resources would or could have generated in alternative use. In Chapter III, I use panel data on health spending and life expectancy in Swedish regions to estimate the marginal cost of producing a QALY. My findings imply that Swedish health care can produce health at a marginal cost of SEK 180,000 per QALY, which could be used as an expectation on how productive health spending would be in alternative use. I discuss methodological issues with this approach and identify some credibility problems with selection-on-observables strategies plaguing this and similar research to date. I address (some of) these problems by assessing coefficient stability and the causal mechanisms between healthcare resource use and health outcomes, using a second panel on hospital bed capacity and mortality. This analysis finds that health could be gained at a cost of SEK 420,000 per QALY by providing more hospital beds. To illustrate the role of this evidence in healthcare priority setting, Chapter IV considers how it could have been used to inform decision making in a case of pharmaceutical reimbursement. I propose that economic evaluation report cost-effectiveness evidence as QALYs forgone per QALY gained. This frames a decision about providing or denying treatment as a judgement on the relative priority of QALYs gained and QALYs forgone, which is more transparent about a trade-off between equity and efficiency than deciding whether the monetary cost per QALY is too high. Framing decisions as health gained versus health forgone could also lead to better decision making by making opportunity costs more salient to decision makers and the reason for sometimes denying costly treatments easier to communicate. In summary, cost-effectiveness evidence can be used to achieve the theoretical objective of health maximisation, but economic evaluations rarely report opportunity costs explicitly as health forgone. This thesis provides the practical means to be explicit and implications for the definition of opportunity cost and the interpretation of cost-effectiveness evidence when health maximisation is not the sole objective of healthcare priority setting.

In opting to acquire nuclear-powered submarines as a part of the AUKUS deal with the United States and the United Kingdom, Prime Minister Anthony Albanese has committed Australia to a price tag of about $368 ...

The notion of "opportunity cost" has been neglected in economics. The reason is that any such measure of cost is invisible, unobservable, and untestable. Yet the so-called 'competitive ideal' in neoclassical theory is based on claims of decreasing returns and substitutional tradeoffs in production, consumption and social relations, and therewith an exclusive focus on scarcity in economics. Within this view, collusion is suspect: it raises prices, reduces sales, and so harms social welfare. This is the baseline emphasis of neoclassical microeconomic theory. The opportunity costs of this framework involve a significant loss of perspective on actual economic phenomena, the potential value of which may far exceed that of orthodoxy. Here are several reasons why. First, the real world is interdependent and not decomposable into parts: all we do initiates effects spreading outward forever on everything. Second, our interconnected environment calls for a network or systems conception of economics in which substitution and complementarities coexist in nondecomposable tangles, obviating any institutional claim for the efficiency of competition over cooperation. Third, if all long-term production occurs with increasing returns, then the nature of economic relations solely reflects substitution for physical goods in short-term contexts; all long-term material outputsas well as all intangible tradesexhibit a complementary connection to make cooperation efficient. Fourth, the unbounded character of economic effects suggests an analytical bound derived from our rational limits, since we cannot see the full range of outcomes stemming from our decisions: planning horizons so enter this scene. Such 'horizon effects' suggest another important distinction in economics of 'atoms, bits and wits,' where atoms (the realm of physical things) are only subject to substitution assumptions in the short run, but shift to complementary interaction for all longer horizons. For bits (the realm of transactions involving information and all intangible outputs) and wits (that of horizon effects), both are realms characterized by complementary relations, so also yielding an economics in which cooperative systems are efficient and where competition cannot but fail by restricting output, knowledge and truth, while promoting a myopic culture in a dangerous self-destruct mode. This is the 'opportunity cost' of neoclassical economics: a world hurtling into a self-destructive failure due to its myopic culture spawned by rivalry, blind to its own pathologies and encouraged by an economics dogmatically closed to realistic conceptions due to competitive frames wrongly imposed in complementary realms, such as in academics, ecology, ethics and organizational learning. These costs far exceed the value realized by this approach. The paper explores these failures in more detail and describes the horizonal theory that would have emerged from the 1930s debates on cost had Hicks not walked away from increasing returns and had Hirshleifer not promoted a false 'rescue' endorsed by Alchian in 1968, when he declared decreasing returns "a general and universally valid law." Because of 'The Hicksian Getaway' in 1939-and 'The Hirshleifer Rescue' in 1962a rigid orthodoxy in economics emerged that was resistant to any alternative views, seeing them as a threat to its unearned dominance instead of as an opportunity to engage in new learning. A (supposedly) 'scientific' community was thus transformed to a closed domain of adherents strongly opposed to open debate and discussion. The curious character of this unheralded situation deserves closer attention than it has gotten thus far. That is the primary aim of this paper.

We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects' debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive $1 less in debt as equivalent to $1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent. (JEL C91, D91, G51)