Case 1.2 Opportunity cost and productivity in agriculture

Summary

This case study shows how the concept of opportunity cost can be applied to calculate a measure of the value of economic activity that incorporates resource costs due to environmental damage from the activity.

Suggested answers

1 What is a society’s benefit from higher productivity?

Productivity equals the ratio of value of output from a production activity to the value of resources used in doing that activity. Hence it is a measure of the amount of benefit that society obtains from the resources used in doing an activity. Because resources are scarce, productivity, the benefit that society obtains from applying its resources, matters. Society will be best off when it gets the greatest amount of benefit possible from any resources that it uses; in other words, by maximising productivity. Of course, as this case study shows, it is important to measure productivity properly (for example, including all resources that are used in doing an activity).

2 Can you think of other examples of activities that cause environmental damage where the value of that damage would need to be incorporated into the value of inputs used in production in order to construct a ‘true’ measure of the productivity of that activity?

There are many possible examples. Where mining activity causes damage to the natural environment that reduces subsequent revenue from tourism or requires expenditure of resources to ‘clean-up’ that damage, then these would need to be included as resource costs; alternatively, where there is some manufacturing operation that causes air pollution which then causes respiratory problems for the population living nearby some of whom then require medical treatment, the cost of that medical treatment would need to be incorporated as a resource cost of the manufacturing activity.