ABSTRACT
Opportunity cost is benefits sacrificed and renounced. This chapter argues that although opportunity cost is the relevant guide, some policy questions must be asked to determine whose opportunity cost counts. Adjustment issues arise in the context of taxation, monopoly, subsidies, foreign exchange, and labor policies. The adjustments also suggest indirect project beneficiaries other than direct producers or consumers and also costs not otherwise reimbursed. Choice of numeraire is largely a matter of convenience and will not affect the size of net benefits, but it can affect project ranking if benefit-cost ratios are used. To maximize the net value of output in an economy, inputs and outputs must be valued at opportunity cost. In the case of general cyclic unemployment, one policy prescription is to let wages decline to a new full employment equilibrium. In practice, a price between the market monopoly price and estimated marginal cost may be appropriate.
