Economic cost looks at the gains and losses of one course of action versus another – in terms of time, money and resources. The gains and losses that might have occurred by taking another course of action are also included when determining economic cost.
Economic cost includes opportunity cost, unlike accounting cost, which only takes into account the amount of money spent.
Economic cost is the accounting cost (explicit cost) plus the opportunity cost (implicit cost).
Sam’s economic cost of building a well includes all the money he spent, plus what he could have done instead – sow wheat in a field or work at his local Burger King.
The economic cost of building a well
Imagine a farmer is building a well. The accounting cost includes renting the digging and underground water-locating equipment, buying cement and other materials, plus the salaries of two workers he employed to help him.
The opportunity cost includes the money the farmer would have made had he been doing something else, such as sowing seeds in an extra field and then reaping the harvest, or working elsewhere, instead of making the well.
The economic cost of the well is the opportunity cost plus the accounting cost.
Before making decisions about spending money, using resources, and dedicating time to something, individuals, businesses and governments should look at the economic cost. If project A is approved, will the economic cost be better than other available alternatives?
The economic cost of space exploration
One of the most heated debates in the world is space exploration and its economic cost. Is it worth spending all that money, using up scientific knowledge time and resources, exploring something which over the short- and medium-term will not, in many people’s opinion, help improve human life on Earth much?
Wouldn’t it be better to spend all those millions of science-R&D hours, trillions of dollars, and other resources building hospitals, irrigation systems in low-income countries, technology into creating a clean source of energy, or finding a cure for cancer?
According to space.com, NASA’s Shuttle Program cost $209 billion, with two of its 134 flights ending in tragedy, killing 14 astronauts. This is a drop in the ocean compared to all the money spent on space exploration globally.
Those $209 billion would have built 41,800 teaching hospitals (at $5 million each) that would have treated millions of patients each year.
Roger Launius, space history curator at the Smithsonian’s National Air and Space Museum, said:
“People endlessly debate this stuff. You can make a case on both sides. It’s not open-and-shut.”
The total (inflation-adjusted) amount of money spent by NASA on space exploration from 1958 to 2014 was estimated to be more than $900 billion.
Wallace Fowler, Director of the Texas Space Grant Consortium and a professor of aerospace engineering and engineering mechanics in the Cockrell School of Engineering at the University of Texas at Austin, believes NASA’s expenditure is good value for money.
Prof. Foweler claims the total economic benefit of each dollar spent on the space program is between $8 and $10, i.e. for each dollar spent, the economy gains from $8 to $10.
Perhaps, in hundreds or thousands of years’ time, when the Earth becomes uninhabitable because a massive asteroid is coming to hit us, or the predicted climate change has gone too far, people will say, as they are transported to another habitable planet, that the economic cost of space exploration was worth it.
Economic cost of obesity
Economic cost can also refer to how much money is involved in dealing with the consequences of a problem.
Obesity has health consequences, but also economic ones. Treating obesity and obesity-related conditions cost the US economy about $190 billion in 2005.
“The enormity of this economic burden and the huge toll that excess weight takes on health and well-being are beginning to raise global political awareness that individuals, communities, states, nations, and international organizations must do more to stem the rising tide of obesity.”
Video – Accounting Cost vs. Economic Cost