Rick Clayton: Accounting for “Opportunity Costs”

An important element in conducting impact analysis is “opportunity costs”. What could otherwise be done with the investment or funding?  Our usual approach to accounting for opportunity costs in the case of a province-wide program, would be to calculate the benefits to a province of a reduction in provincial bonds outstanding. This would simulate the investment or funding not taking place at all, and thereby reducing the provincial deficit financing needs.

Current interest rates are low. The cost to a province of not having to pay the requisite bond coupon is likely to be less than the economic benefits derived from the funding or investment. This is to be expected at a time when the Ontario economy is suffering from non-optimum capacity utilization, and unemployment. Economists would generally say that industrial capacity utilization should be 85% at full practical output, and unemployment should not exceed 5.5% or thereabouts. Ontario’s unemployment is higher, and its industrial capacity factor lower, than these optimum points. Accordingly, it makes sense to stimulate the economy. In this context, the investment of funding is likely to be contributing positively, over and above the hypothetical costs of the requisite equivalent financing charge. Nevertheless , the opportunity costs are a factor that should be considered in developing a credible impact and multiplier analysis for any investment or funding allocation.

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