Application of Opportunity Cost Doctrine
The opportunity cost doctrine has a wide application in the field of economic theory. It applies to the dctc reunion of values both internally and internationally. It also applies to income distribution. Lin citation». There arc, however, some limitations in its application: (i) Specific. It does not apply to productive services which are specific. A specific factor has no alternative use. Its transfer cost or opportunity cost is, therefore, zero. Hence, the payment made to this factor is of the nature of rent (preferably called non-cost outlays).
(ii) Inertia. Further, the doctrine of opportunity cost does not take into consideration the element of inertia. Tho factors may be reluctant to leave an occupation. In a case like this, where a factor’s preference may have to be overcome, a payment exceeding the P’ftl) transfer cost will have to be made to induce it to an alternative occupation. .
(iii, ‘Jon·pecuniary considerations. In view of these none-pecuniary considerations, the notion of objective costs must he given up. The theory of opportunity costs can be restated thus: “The cost of productive service X in making~ A is equal to the amount B that X could produce plus (ur minus) the non-pecuniary returns (01 cost) attached to producing U:>6lt has been suggested that non-pecuniary returns should be converted into pecuniary returns to restore objectivity to the theory. But it is not always possible to find a common monetary denominator for the purpose. (iv) Factors Not Homogeneous. Besides, it should be remembered that units of productive service are rarely homogeneous. This obstructs their transfer.
(v) Wrong~ Assumption. Moreover, the theory is based on perfect competition which seldom exists. (I”i) Individual and Sucial Costs. Another discrepancy may arise on account of the difference in individual and social costs. A product may cost the factory owner Rs. 10 but to the society it will cost something in the form of ill-health due to the smoke that his factory sends out. Conclusion. In spite of all these limitations and complications, the theory of cost, viz., theory of opportunity or alternative costs, is the most acceptable one at present. Certain features of this theory are worth nothing:
(i) Cost of production of a commodity depends on demand prices of other commodities to the production of which the same productive service can contribute.
(ii) This cost analysis is not vitiated by the fact that a commodity is produced by the combination of several factors because marginal product of each factor can be ascertained. Social cost. It is the amount of cost the soccity bears due to industrialization. Industrialization has certain economic and social merits, but along with the merits, they bring about certain demerits also. They