Previous Year Question

Opportunity Cost is the value of the next-best alternative sacrificed to obtain a particular good or service. A zero market price for the consumer does not necessarily mean that the commodity has zero opportunity cost.

Option (c) is correct.

When the Government provides a commodity free to a consumer, it does not charge that consumer a direct price. However, labour, capital, land, energy and administrative resources are still required to produce, procure, store, transport and distribute the commodity.

The Government primarily finances this expenditure through tax revenue or other public resources. The tax-paying public therefore bears the financial cost instead of the consumer receiving the commodity. The same resources could have been used for education, healthcare, defence, infrastructure or another public programme. The sacrificed next-best use constitutes the actual opportunity cost.

For example, if the Government distributes commodities costing ₹1,000 crore without charge, consumers do not pay a price. Nevertheless, ₹1,000 crore of public resources cannot be used for an alternative project. The commodity is free for the consumer but not costless for the economy.

Option (a) is incorrect.

Opportunity cost can be zero only when the resources are not scarce and possess no alternative use. Public funds and productive resources are scarce and consequently have an opportunity cost.

Option (b) is incorrect.

Ignoring a cost is different from the cost not existing. Even if the Government or consumer does not calculate the opportunity cost, the sacrifice of an alternative use remains real.

Option (d) is not the best answer.

The Government is not an independent ultimate source of resources. It finances expenditure through taxes, non-tax revenue, borrowing and other public receipts. Among the given alternatives, transfer of the cost to the tax-paying public is the more appropriate economic description.