What is economic cost?
Economic cost looks at the gains and losses of one course of action versus another. It does this in terms of time, money, as well as resources. The term also includes determining the gains and losses that might have occurred by taking another course of action.
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). Implicit cost refers to the monetary value of what a company foregoes because of a choice it made.
Economic cost – 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 purchasing other materials. It also includes 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. He could have sowed seeds in an extra field and then reaped the harvest. Alternatively, he could have worked 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 and dedicating time to something, we should look at the economic cost. If we approve Project A, will the economic cost be better than other available alternatives?
Economic cost – 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, and using up scientific knowledge time and resources?
Is it worth exploring something which over the medium-term will not help improve human life on Earth much?
Wouldn’t it be better to spend all those R&D hours and trillions of dollars on other things? For example, wouldn’t the world be better off if we used that money to build new hospitals?
Imagine the benefits for low-income countries if all space exploration money went to creating irrigation systems.
What if all that money had gone into finding a cure for cancer or a clean source of energy?
According to space.com, NASA’s Shuttle Program cost $209 billion. Two of NASA’s 134 flights ended in tragedy, killing 14 astronauts. This is a drop in the ocean compared to all the money spent on space exploration globally.
The impact on health care
Those $209 billion would have built 41,800 teaching hospitals at $5 million each. Subsequently, millions more patients would have received important treatment.
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.
Professor Wallace Fowler, Director of the Texas Space Grant Consortium, believes NASA’s expenditure is good value for money.
Prof. Fowler claims the total economic benefit of each dollar spent on the space program is between $8 and $10. In other words, for each dollar spent, the economy gains from $8 to $10.
Perhaps, in hundreds or thousands of years’ time, our Earth will become uninhabitable. Maybe a massive asteroid will strike, or climate change will be too severe.
If that happens, and we migrate to other planets, we’ll be glad we’d spent money on space exploration.
Economic cost of obesity
Economic cost can also refer to how much it costs us to deal 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.
According to the Harvard School of Public Health:
“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.”
A study estimated that the global economic impact of obesity in 2014 was $2 trillion. This represented 2.8% of global GDP. GDP stands for Gross Domestic Product.