Legal Definitions - opportunity cost

Opportunity Cost refers to the value of the next best alternative that was not chosen when a decision was made. It is the benefit that an individual, investor, or business misses out on when selecting one alternative over another. Essentially, it's the cost of what you gave up to get what you chose.

Here are some examples to illustrate this concept:

• Example 1: Business Investment Decision

  A technology company has $1 million to invest and is considering two primary options: either developing a new, innovative software application or upgrading its existing server infrastructure to improve current service reliability. If the company decides to invest the $1 million in developing the new software application, the opportunity cost is the improved service reliability and potential customer satisfaction that would have resulted from upgrading the server infrastructure. They chose the potential for new revenue from the software, but gave up the benefits of better existing service.

• Example 2: Legal Strategy Choice

  A plaintiff in a civil lawsuit is offered a settlement of $50,000 by the defendant. The plaintiff believes they could win $100,000 if they take the case to trial, but going to trial would involve significant additional legal fees, emotional stress, and a risk of losing entirely. If the plaintiff decides to reject the settlement and proceed to trial, the immediate $50,000 payment and the certainty of avoiding further legal costs and stress become the opportunity cost. They are giving up a guaranteed, immediate benefit for the chance of a larger, but uncertain, future gain.

• Example 3: Government Resource Allocation

  A city council has a budget surplus of $5 million and must decide between two major public projects: building a new community recreation center or significantly expanding public transportation routes. If the council votes to allocate the entire $5 million to building the new recreation center, the opportunity cost is the improved accessibility, reduced traffic congestion, and environmental benefits that would have come from expanding public transportation. The city chose to prioritize recreational facilities, thereby foregoing the benefits of enhanced public transit.