Economic cost

Economic cost is the combination of gains and losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. The goods to be taken into consideration are e.g. money, time and resources.

The comparison includes the gains and losses precluded by taking a course of action, as those of the course taken itself. Economic cost differs from accounting cost because it includes opportunity cost.

As an example, consider the economic cost of attending college. The accounting cost of attending college includes tuition, room and board, books, food, and other incidental expenditures while there. The opportunity cost of college also includes the salary or wage that otherwise could be earned during the period. So for the two to four years an individual spends in school, the opportunity cost includes the money that one could have been making at the best possible job. The economic cost of college is the accounting cost plus the opportunity cost.

Thus, if attending college has a direct cost of $20,000 a year for four years, and the lost wages from not working $25,000 a year, then the total economic cost of going to college would be $180,000 ($20,000 x 4 years + the interest of $20,000 for 4 years + $25,000 x 4 years).

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