The dark shaded area is the cost of inputs from producing the good. ◦Any government regulation that causes an increase in this dark shaded area is creating an opportunity cost. ◦But changes in this region are not necessarily equal to the social cost of the change..Costs of Inputs from ProductionEstimating Costs
Valuing InputsPerfect competition; no price effectsGovernment purchases q’ for a project.Suppliers provide q’ with no increase in price. There is no displaced consumer surplus.Opportunity cost equals the government expenditure.BenefitsCostsOriginal buyersSellersProject expendituresANet Social CostAEstimating Costs
Valuing InputsPerfectly Inelastic SupplyGovernment purchases land which is fixed in supplyPrice will rise, crowding out buyersThis creates displaced consumer surplus and increased producer surplusOpportunity cost equals the government expenditure plus lost consumer surplus.