Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, October 13, 2005

Transaction Costs and Opportunity Costs

The Knowledge Problem has a brief item about a man who has a natural gas well on his property and hence is not worried about the expected gargantuan jump in energy prices this winter because he has "unlimited free heat, hot water, and cooking fuel".

One commenter had exactly the same reaction I did [my paraphrase follows]: Free? What about the rubric, "There's no such thing as a 'free' lunch"? What about "opportunity costs"?

To which the next commenter replied:

He can use his own gas without paying for transmission and distribution, including the associated returns on ratebase to the transmission and distribution entities.

If he sells his gas into the market, his price is a function of the quantity he can provide, the pressure at which it can be provided, his location relative to transmission and/or distribution, etc.

His profit on the sale of his gas into the market is a taxable transaction; his purchase of the quantity of gas he requires for his own use is an after tax transaction.

Unless he is in the position to produce far more gas than he requires to meet his own needs, it would seem that the greatest opportunity cost is the opportunity lost by his attorney and tax accountant.
Good old transaction costs. I keep teaching that they are important, and here is another good example.
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