Reality of Opportunity Cost

Opportunity Cost: “A benefit, profit, or value of something that must be given up in order to acquire or achieve something else. Given the fact that every resource, that is land, money, time, capital, etc, can always be put to some alternative use(s), every decision to use resources has an associated opportunity cost.”
In a world of scarce resources, the reality of opportunity cost is something that everyone must tackle on a day-to-day basis. For example, every individual who spends $7.00 on a taxi forgoes some best alternative use of that financial resource, such as buying food. For instance, one pack of bread in Belize is $1.75. This means that the individual’s taxi fare could be looked at as the equivalent of four packs of bread that could have been purchased.
From the man on the street to the wealthiest among us, opportunity cost remains as a fundamental consideration—if even at a subconscious level.
A clear example of Opportunity Costs
The residents of Belize City have, for the last year, received a palpable object lesson in the realities of opportunity costs in terms of what was forgone to gain roughly 100 cement-paved streets.
The Belize City Council, under the leadership of Mayor Darrell Bradley, opted to embark on a massive—and relatively innovative (as far as Belizean politics is concerned)—project to abandon CITCO’s traditional street-repair approach for a total remodelling of the streets.
Financed by the $20 million Municipal Bond, the council began its renovation project that saw 100 streets cemented (not paved or patched up), among other things such as an upgraded downtown Albert Street and renovated BTL Park.
Needless to say, those streets that have been cement paved are, for the most part, a smooth drive for drivers.
At this point, it is necessary to commend Mayor Bradley for taking the initiative on this project to remodel and uplift a city that had never seen this level of works before. Certainly, there are areas that are worthy of sharp criticism; but that is not the purpose of this article.
So, with that said, (and ignoring, for now, the probability that some streets may have been poorly constructed) what were some of the opportunity costs of getting this remodelled city with a 100 cement-paved streets?
Well, a cursory drive throughout the city could answer that question quite easily, because, in a city that has 520 streets, only 100 of them have received the council’s full attention within the last year. Therefore, by the time the November rains had come and gone many of the older 400 plus streets were found to be in truly deplorable conditions.
A prime example of the post-neglect and post-precipitation conditions could be seen on Vernon Street, where many motorists have opted to adopt the dangerous-to-pedestrian practice of driving on the side walk to avoid the crater-like potholes nearest to Youth For the Future Drive.
Obviously, Vernon Street is only one example, as some other streets, such as Raccoon Street Extension with its huge pot holes, provide a wavy ride for drivers—especially those who own low cars. (Let’s ignore for now the indirect cost to drivers whose vehicles are damaged on these broken up streets).
Indirect Costs
But the streets are only part of the opportunity costs, as there are indirect costs as well. For example, the council has been looking feverishly at ways to streamline costs or pass them off onto the Belize City residents, especially since they have to finance the bond.
In an effort to boost revenues for the cash-strapped council, a new $10 vehicle inspection fee has been added to drivers who take their cars to be licensed for the road.
Also there is the looming threat to the sanitation company Belize Maintenance Limited (BML) that their contract will not be renewed when it comes to an end.
Mayor Bradley, speaking to the media last October, said: “[The BML contract] is a contract which costs the city $78,000 per week. That will expire January of 2015 … the thinking that we have is that we will not renew that contract and what we will do is that we will put in place legislation to require people to clean and maintain two feet in front of their property line.
“I [Mayor Bradley] think that the city pays too much for sanitation services. If we could cut that cost down by one half that would be increased cash flow. The BML contract costs the city $4.2 million per year.
“If we did not have to pay that bill I wouldn’t need a bond. We would have enough revenues so that we would be able to service the other sanitation contract and so we could meet our commitments in terms of streets and markets and cemeteries and parks and different things like that.”
As can be inferred from the Mayor’s statement, there’s naturally an economic cost and a social cost to consider.
Economically speaking, that $4.2 million per year could go a long way as the Mayor rightly indicated, and all that is given up, at a glance, is the sanitation contract. But what about the economic lost in terms of the potentially displaced workers?
Moreover, the cancellation of that contract leaves a void that simply transfers the cost to citizens who would then have to “maintain two feet in front of their property line.”
No mention has been made (at least not publicly) of penalties for citizens who don’t comply with that legislation, but we can safely assume that there will be these “offenders” and there would be at least two costs to consider when they do not comply.
Firstly, there will be an enforcement cost as someone has to check up on these “offenders” to get them to obey the would-be law; and secondly, while the “offenders” aren’t doing their part, sanitation in the city declines.
A reduction in the level of sanitation may have a direct effect on public health, among other costs. For example, what’s the cost of an increase in the population of the Aedes aegypti mosquito—the very same insect that spreads many diseases including dengue?
The fact of the matter is that any way you look at it, every decision that the council makes to acquire or do something has a direct or indirect opportunity cost that could be either economic or social.
The cost of not developing our private sector
As was stated earlier, the situation with the Belize City Council and the Municipal Bond initiative was used here as an object lesson only.
There may be many other factors to have been considered within the last year alone, including whatever positive or negative externalities the works themselves had caused.
For example, while the works were being doing on the George Price Highway near the cemetery, there were some taxi men whose sales declined. The same complaint was true for some businesses throughout the city.
However, the real thought-provoking question here should be this: if these are the levels of direct and indirect costs that could occur at the municipal level, what are the costs of decisions made at the national level?
Recall that these “Cornerstone of Development” articles have been looking at the need for a viable and efficiently functioning private sector. Therefore, we ask: “What is the cost of not having the enabling environment for the proper development of the private sector?”
It is clear that there is still this questionable (possibly cultural) perception that government must provide jobs for people. Often on morning talk shows, there are those who make reference to the government’s need to help them find work.
Now, please don’t misunderstand. As was discussed in the February 2nd issue of this column entitled “Positioning ourselves to gain from trade”, there is a place for government in terms of providing assistance to those parties who are affected adversely from certain business trends. That’s natural because, especially in the short-run, there will always be those who “lose” where others within the private sector gains. It’s competition after all.
However, it may very well be that there’s been a slight confusion between government’s role as a “temporary safety net” or supplementary aid, and its perceived role as government the employer.
The bottom line is that it’s not ideal to have government take on the latter role, because aside from the fact that it is more costly (remember the concept of what Opportunity Cost is), it is also much more prone to inefficiency.
Referring back to the private sector assessment report, it states:
“Available data indicate that the Government of Belize has had an expanding role in employment and compensation since 1990.
“Reflecting this feature, the government’s wage bill is high inter-temporally and by regional and international standards … In this regard, Belize’s wage bill averaged about 11% of GDP in 2000- 2010. In comparison, in 2000-2008, employee compensation as a share of GDP averaged about 5.2% of GDP for low income countries.
“In the absence of expanding revenue, the growth in the wage bill poses a threat to PSD.”
In the short-run, it may seem practical for government to have an increased “parental” role; however, over the long run things can quickly change.
The opportunity cost of not having a well-developed (and well-regulated) private sector is that unemployment will continue be relatively high, and the approximate 40 percent of our fellow citizens who live below the poverty line will remain there.
Remember, there’s only so many government jobs that could be created.
Venezuela could rain on the parade
Some may say the infrastructural projects (financed primarily by PetroCaribe) are enough. I’d say as a stop-gap measure, maybe. But then that brings us to whether these project’s can be used to secure genuine, long-term socio-economic mobility (that is the movement of individuals from one social class or economic level to another).
These works–even if they don’t end completely–would slow down, and then what?
It is then we will unearth the true opportunity cost of having not paid sufficient attention to ensuring that our own private sector is fully developed.
We would also simultaneously realize the error of not investing in our human capital so that those in the “lower economic levels” could actually augment their skill levels so as to be in a better position to find better jobs on their own accord in the private sector.
Like the pot holes in the city’s streets, a deplorability that was further exacerbated by the unforeseen torrential rains late last year, all it takes for something “unforeseen” to happen to the PetroCaribe arrangement to leave us high and dry.
That is not a remote possibility by the way, as one Caribbeannewsnow article, entitled “Petro Caribe: are Caribbean countries prepared for the worst?”, pointed out this week.
That said article states:
“Caribbean governments that are members of the Petro Caribe Agreement with Venezuela would be prudent by beginning to adjust their budgets to take account of the loss of benefits now derived from the oil arrangement… Two events are playing-out in Venezuela to which vigilant officials in Ministries of Finance in Caribbean countries should be alert.
“The first is the problematic state of the Venezuelan government’s finances and the other is the increasing confrontation between dissenting groups and the government that has spurred violence in the streets.
“Venezuela’s economic conditions make it tough for President Nicolás Maduro to continue the largesse of Petro Caribe started by his predecessor Hugo Chávez. Inflation is now at 56 per cent; … [and] the rating agencies…have downgraded Venezuelan bonds to junk status.”
In the same way, the City Council could have benefited from more, genuine multiple-stakeholder consultations to avoid many of its “mistakes”, it’s important that central government improves such consultative processes to ensure that there is true counting of the costs and ensure true private sector development that could have much more long-term benefits.

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