November 30, 2011
November 30, 2011
Economist’s Notebook: Lake O Streetcar and Accounting v. Opportunity Costs
By Patrick Emerson
Oregon Economics Blog
An article in The Oregonian discusses the new and improved cost figures for the proposed Lake Oswego Streetcar extension. In it, there is a discussion about whether the cost of the land that was purchased years ago should be included. This is a classic lesson in accounting versus opportunity costs in economics:
The new figure also does not include land owned by the government that originally had been included with capital costs. That alone reduced the price tag now being promoted by $80.3 million.
OREGONIAN: “I don’t think it’s disingenuous at all,” said Obletz, who argued that the land is “not a cost to the project. It may be correct to say the land is not an accounting cost for the project going forward, but it is entirely incorrect to say it is not a cost of the project. The reason economics makes the distinction is that the opportunity cost includes the next best alternative useage for the land and thus deciding to use the land for this project makes it unavailable for other uses.
In other words, if the land can be sold say for $100 million than utilizing it for this project denies that $100 million for any other use. So, if you are doing a cost-benefit analysis of a project you have to include this cost as well, it is just as important as any real accounting cost going forward.
I kinda hope the streetcar gets built, it’d be pretty cool, but let’s be real about the cost.
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