ABSTRACT
Economics is about tradeoffs, and opportunity cost is the basic concept used to analyze tradeoffs and explore alternatives. Opportunity cost is the value of the next-best use of a resource, where value is measured as foregone alternative benefits. All costs are opportunity costs, and all opportunity costs are foregone benefits. Risk-reduction resources are being used wisely if it is impossible to reallocate those resources to produce more risk-reduction benefits. Many factors alter benefits over time, which introduces great uncertainty into analysis of long-lived projects. Whenever they can, economists use price data from markets to estimate benefits, not because the data are valid, but because they are cheap. However, markets miss and mismeasure benefits for many reasons, including “market failure”; buyer manipulation and confusion; and a variety of other technical, social, and economic factors that distort prices. Even without such distortions, market-generated benefit estimates are incomplete because they ignore “extra-market” concerns and values such as irreversibility, equity, and community need . Recognizing that weaknesses in benefit measurement and a tendency to ignore feasible alternatives often plague economic analysis, specific techniques such as risk-benefit, comparative risk, benefit-cost, and cost-effectiveness analyses are nevertheless capable of informing and improving risk management decisions. However, they should be applied with extreme caution, keeping in mind their limitations.
