Solution: Chapter 1 – Problem 1DQ – The Economics of Public Issues, 20th Edition

Concept introduction:

Opportunity cost:

If one alternative is chosen over anotheralternative, then there is a cost involved inchoosing thealternative i.e. the cost of the foregone alternative. This foregone cost is known as the opportunity cost.

To determine:The actionto be taken by the consumers.


The consumers were not fully aware about the effects of the prescribed drugs because of which the they did not force the U.S Food and Drug Administration (FDA) to take favorable steps.The economic decisions generally involve opportunity costsmainly due tothe scarcity of resources. In the given case, opportunitycost also includes the cost incurred in the decision making for introducing a new drug. If the drug is introduced in a hurry without proper testing and examination, then it may lead to negativeconsequences.

On the other hand, if some lengthy process is followed to testthe drug, then it may result in thedeath of a person due tothe delay in providing timely medication. Hence, there is tradeoff between the two types of errors while deciding onthe introduction of a drug. The errors are as follows:
Type I Error: When there are some side effects of the new drug, which are even greater than thebenefits.
Type II Error: When the drug is not introduced despite theurgencyassociated with releasing itdue to various regulations.

The tradeoff wouldinvolve opportunity cost as the FDA has to decide between whether to introduce or not to introduce the drug. The testing processof the drug wouldinvolve time and cost. The delay caused due to this may also lead to the deaths of patients.

People pay attention only to the Type I Error and not to theType II Error. This is primarily because Type I Error is apparent, whereas Type II Error is difficultto identify.The decision to introduce the drug can be justified onlywhena person is so ill that his survival is purely dependenton that drug only.

Thus, it is difficult for an individual to decide between Type I Error and Type II Error. As a particular individual does not have any expertise in the field; therefore, he or shecannot force the FDA to introduce the drug.