Browsing by Subject "opportunity costs"

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    Evalutation of payments for ecosystem services in the valley region of Bolivia
    (2009-04-24T15:57:48Z) Hoffman, Cassie Ann
    Market based mechanisms are proliferating around the globe as a means to offer direct economic incentives for protecting and conserving ecosystem services. Among the ecosystem services being marketed, payments for watershed services (PWS) are the most difficult to establish clear service provision. Most PWS use a land-based compensation method, assuming that specific land management practices will result in the desired watershed services. Past evaluations of financial benefits for PWS service providers have suggested that payments have been relatively insignificant when compared to income or opportunity costs of market participants. This report explores whether the payment employed in a PWS implemented by the non-governmental organization Fundación Natura in the Los Negros watershed of Bolivia offers significant incentive to conserve forest cover and has the ability to meet landowners’ opportunity cost of alternative uses of land. Since 2003, upstream farmers have enrolled parcels of land and been compensated $3 per hectare per year for conserving forest cover. In 2008, sixty-two farm surveys were completed and their location geo-referenced in the Los Negros watershed to determine annual net farm income per hectare as a measure of marginal opportunity cost to land. Opportunity costs were modeled using biophysical characteristics of farm parcels, economic parameters of the market and distances to roads. The model was used to map opportunity costs across the watershed. The economic model predicted significant variation in opportunity cost across the Los Negros watershed with a range of US $0 to $8493 per hectare. The majority of landowners were overcompensated with 75% of the area in conservation carrying opportunity costs of US $0 per hectare. Other areas are significantly under-compensated at the current compensation rate and could be under the highest threat of deforestation. While increased cost effectiveness could be achieved and more meaningful incentives offered to landowners by differentiating compensation, consideration should be given to non-financial benefits of the PWS, such as strengthened property rights, as well as the political costs of price differentiation.
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    Limited Means and What I Can't Buy: Resource Constraints and Resource Use Accessibility Drive Opportunity Cost Consideration
    (2011) Spiller, Stephen Andrew

    Every consumer decision incurs a cost. An hour spent researching products is an hour not spent working. Vacation days used in the winter are vacation days not used in the summer. A dollar spent on a car payment is a dollar not spent dining out. What determines the extent to which consumers consider such opportunity costs when making decisions?

    Although every purchase requires an outlay cost (i.e., spending dollars in order to obtain a good), outlay costs only have economic significance because some other good or service must be given up as a result. Consumers have unlimited wants but limited resources, so satisfying one want means not satisfying another (the opportunity cost). An opportunity cost is "the evaluation placed on the most highly valued of the rejected alternatives or opportunities" (Buchanan 2008) or "the loss of other alternatives when one alternative is chosen" (Oxford English Dictionary 2010). Opportunity costs are foundational to the science of economics and, normatively, consumers should account for opportunity costs in every decision they make. I define opportunity cost consideration as "considering alternative uses for one's resources when deciding whether to spend resources on a focal option."

    Because consumers face opportunity costs, every purchase decision is effectively a choice among alternative resource uses, not just a decision of whether or not to make a particular purchase. When consumers consider their opportunity costs, alternative resource uses specify the broadest form of competition that products face: each resource use competes for share-of-wallet with all other potential resource uses. Understanding when consumers consider a purchase decision as an allocation across multiple options, and what those considered options are, allows researchers and practitioners to better understand why consumers make the purchases that they do, why they restrain from making the purchases that they do not, and how to influence purchases of focal options by increasing or decreasing consideration of alternative resource uses.

    What determines when consumers consider opportunity costs? In Essay 1, I propose that consumers consider opportunity costs when they perceive immediate resource constraints. In Essay 2, I propose that consumers consider opportunity costs when the resource in use increases the accessibility of alternative resource uses in memory.

    Beyond addressing when consumers consider opportunity costs, I address three additional questions. First, who is more likely to consider opportunity costs? Individuals with a high propensity to plan are likely to consider opportunity costs even when they are not immediately constrained. Second, which opportunity costs are consumers more likely to consider? Consumers are more likely to consider opportunity costs that are more typical of the category of possible resource uses than opportunity costs that are less typical of the category of possible resource uses. Third, what are the consequences of opportunity cost consideration? Individuals who consider their opportunity costs are more sensitive to their value than those who do not consider them. In addition to aiding our understanding of the consumer decision process, understanding opportunity cost consideration has important implications for consumers' sensitivities to the structure of the decision environment, understanding the nature of competition and cross-price elasticities, memory for foregone options, and construction of preferences.