Say your new $1000 Macbook Air falls out your car window and breaks in half. You, after getting over it, decide to buy another $1000 Macbook Air. This makes the people at Apple happy: they can produce one more laptop, pay a few more employees for the day and make a little more profit. You breaking your laptop stimulated business for them.
But economy wise, your dumb clumsiness made the rest of us poorer. That extra $1000 lost means you can no longer afford a nice television, a new printer or a stack of books on how to stop being clumsy. You and all our businesses that could have benefited from your $1000 are worse off. (You could’ve bought my books with plenty left over. But now you can’t). So thanks for that.
If we can learn anything from your clumsiness though, it’s that: Economic efficiency is about everybody. If an event unnecessarily benefits a few individuals, but makes other people worse off, then the event has hurt our economy.
Here are other examples of economic inefficiency:
-Paying two people to do a one man job (as a result of a union pushing for more employment) might benefit the two guys. But the company will now have less money for salaries, rent and marketing, making everybody else in the company poorer.
-Giving more aid to the military might benefit those in the military. But if the military will cause more destruction than good, and if that money could be used for a more productive purpose like building a fast national train, everybody will be poorer for supporting the military over the train.
Economists think about the scarcity of resources we have, and the choices we have to make on how to use them. They realize that every choice comes with an opportunity cost, since for whatever we choose to produce, we are giving up the finite time, energy and resources to produce something else. With this in mind, a good economist will generally advocate policies that improve the net welfare for an entire society, not just a few of its constituents.
After feeling bad for ruining the economy (as you should), you’re probably wondering: “Won’t those Apple employees put the money back into the world eventually? Won’t that union worker do as well?”
Sorry bud, but there is still inefficiency because it will take more time for that money to return. I rather you (and all the clumsy people like you) buy my books today than wait for those Apple employees to buy it tomorrow. By slowing down our economy, you are hurting our economy.
Also, forget tomorrow for a moment, and think about today. Economic activity today will be spent doing stuff that could have been prevented, rather than creating something new.
The Apple employee will be making your computer, instead of making somebody else’s. The union worker will do his job half-assed, instead of switching careers to something productive, like teaching. The soldier will be rebuilding infrastructure (that didn’t have to be destroyed), rather than manufacturing a train that could go from New York to Los Angeles in two hours.
That’s the point about opportunity costs: anytime we have to produce something, we are losing the opportunity to produce something else. The opportunity cost of deliberate inefficiencies is human progress.
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