Scarcity, choice and opportunity cost

The fundamental problem of economics is scarcity. There are infinite wants, but limited resources and so all societies have to make a choice about which wants to satisfy. The cost of that choice is called the opportunity cost and is defined as the next best alternative forgone.

An example of these concepts is seen in the article linked below, which describes how the health service for England has rejected the use of a cancer treatment because they do not consider the benefits to be worth the costs.

A few words on health provision in the UK. The National Health Service (NHS) provides healthcare free at the point of use. No member of the British public, or indeed visitors, are charged for NHS care although there may be a small charge for prescriptions. The service is paid for from general taxation which means that those not working, the old or the young are not required to have contributed to tax in order to benefit. There is little need, or requirement, to have private health insurance and only 9% to 11% of the population have it.

The NHS therefore provides healthcare from a budget allocated by the government. This is, by definition, limited and the NHS must decide on the most effective way to allocate the resources it has between alternative uses.

This is a classic case of scarcity, choice and opportunity cost. The drug the article is concerned with treats a form of breast cancer that affects about 1200 women a year. It costs 90,000 GBP (AU$153,000) a year and is estimated to extend life for the average patient by around nine month.

The decision to deny access to the drug seems callous. It is really quite distressing to those who will be denied access. But what is the opportunity cost of providing the treatment? What could the NHS do with 108 million pounds a year otherwise? Of course the answer is quite a lot and hence the decision not to fund the drug.

The diagram below shows a PPF for the NHS.

As the NHS has a limited budget they cannot simply buy more of all cancer treatments. If they provide extra breast cancer treatments by reallocating resources from point A to point B there will be CD more breast cancer patients treated, but EF fewer patients treated with other forms of cancer. This is the inevitable consequence of scarcity. The opportunity cost of providing CD more breast cancer treatments is, in this case, EF fewer other treatments.

The Guardian article is here

This is a fundamental principle for all economics students when starting their course. This is a particularly unpleasant exampleto illustrate these central concepts.