Economics seminar: Opportunity costs and decision making in the public sector
Gustav Tinghög, associate professor of economics at Linköping University, will present his recent experimental work on opportunity costs and decision making that suggests that opportunity costs matter much less for public decisions, than for private decisions.
A fundamental tenet of economics is that opportunity costs matter. An opportunity cost is the value (utility) lost due to a choice not made. When resources are directed toward a particular use, there is always another use that cannot be met. This study shows that ignoring opportunity costs contributes toward an artificially high demand for public expenditures. Artificial, as the expressed demand for the public expenditure exceeds the true valuation of the public. Tinghög argues that this tendency will result in inefficient use of scarce resolurces and that decisions will be taken that can result in health losses, lower welfare and higher levels of inequality.
Tinghög will also link his experimental findings to central psychological mechanisms that lead individuals to ignore opportunity costs. He argues that a structured approach to opportunity costs can help overcoming cognitive limitations that make us ignore important information.