Reading my development economics textbook, I was informed that the opportunity cost of a private investment is the market value of the wages, goods and services used for the investment.

Here's a hypothetical situation: suppose that the firm could invest in an alternative project with the same amount of resources but a higher return. Would it not be myopic to overlook this alternative investment when asserting that the opportunity cost is the market value of inputs? It leads me to wonder why the inputs weren't valued higher. It could be because others in the market don't have access to capital, knowledge of the opportunity or the expertise required to make the investment. Still, why would the opportunity cost not be the income that could potentially be created from the alternative investment? Is a 'market value' approach just a simplification?


1 Answer 1


The market value of the inputs are determined by the most lucrative possible investment opportunity. Yes, the concept of market value is a simplification. If your firm alone can make the investment then the market is not functioning in a competitive way and hence is unable to assign prices in an informative way. If other firms cannot make the same investment but they can at least make investments with similar returns then the market value of the inputs would still be informative.


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