Sunk Costs, Pecuniary Externalities, and Transfer PaymentsEstimating CostsEstimating Costs
What are not cost?Sunk Costs – Costs that have already been incurred and cannot be recovered. Pecuniary Externalities – Actions that change relative prices or affect the value of assets and create benefits for or impose costs on third parties, but which function through the market system. Transfer payments - Monetary payments from one group to another that do not affect total resources available to society. Estimating Costs
Sunk CostsOpportunity costs of a decision are determined by what must be given up today and in the future.◦Opportunity costs are not determined by what has already been given up. These costs are already “sunk.”A sunk cost is a cost that has already been incurred and cannot be recovered. ◦Sunk costs are excluded from the calculation because the cost will be the same regardless of the outcome of the decision.Totally unrecoverable sunk cost should not be considered in the welfare calculations, but goods that have scrap value should be included.