Legal Definitions - implicit cost

Implicit cost refers to the value of a benefit that is foregone when an alternative choice is made. Unlike an explicit cost, which involves a direct monetary payment (like paying rent or wages), an implicit cost does not involve an actual cash outlay. Instead, it represents the opportunity cost of using a resource for one purpose rather than its next best alternative. It's the value of what you give up by choosing one option over another.

Here are some examples to illustrate implicit cost:

• Example 1: A small business owner using their personal vehicle for business deliveries.

  A baker who owns a small pastry shop decides to use her personal car to deliver custom cake orders instead of hiring a delivery service or buying a dedicated delivery van. While she doesn't pay herself for the use of her car, the implicit cost is the potential income she could have earned by renting out her car to a ride-sharing service or the value of the wear and tear and fuel expenses she incurs that she isn't explicitly accounting for as a business expense. She is foregoing the opportunity to use her car for another income-generating purpose or to avoid personal expenses.

• Example 2: A recent college graduate choosing to pursue a master's degree full-time.

  After completing her undergraduate studies, Sarah decides to enroll in a two-year full-time master's program immediately. The explicit costs include tuition, books, and living expenses. However, the implicit cost is the salary she could have earned if she had entered the workforce directly after her bachelor's degree instead of continuing her education. She is giving up two years of potential income and work experience by choosing to study full-time.

• Example 3: A tech company developing new software using its existing engineering team.

  A software company decides to allocate a team of its highly skilled engineers to develop a new internal tool, rather than assigning them to a client project that would generate immediate revenue. The company isn't paying extra salaries for these engineers, as they are already on the payroll. However, the implicit cost is the profit or revenue the company foregoes by not having that engineering team work on a client project that would have brought in external income. The company is sacrificing potential earnings from an alternative use of its valuable human resources.