Opportunity Costs

One of the classes taught in the second semester is Engineering Economics. It essentially teaches the basic concepts of project finance, cash flows, and different types of financial analysis. As most engineers are focused on design, fabrication, and implementation, this subject can be easily overlooked. It also teaches some basic concepts that are sometimes contradictory to common knowledge and easy to forget about in daily life. One of those concepts is “opportunity cost”. As I listened to the lecture on opportunity cost, I could see that several other students didn’t quite understand the meaning. It was fortunate that I had been taught this about one year prior, and the concept was still fresh in my mind. I decided to share an example with the class in the hopes it would help some of the students understand.

If you own a 5 story building in Kathmandu, occupying any part of the building is free. You could rationalize to yourself that living with your family in the building is free too. Furthermore, if there was space for a shop on the ground floor, you could put your own shop in that space. It would be tempting to say that your shop would have free rent there, but in fact it doesn’t. If your shop wasn’t taking up the ground floor, then you could rent that space to another shop owner for 1 lakh rupees. Therefore, when you put your shop there, it isn’t really free. You are foregoing an income of 1 lakh. This 1 lakh is the opportunity cost and it means that the shop you own is effectively costing the rent that you are forgoing. In other words, it is costing you the opportunity to rent it to someone else.

With most of the students understanding, I decided to give another example, one even more prevalent in the current situation. For me, tuition and living expenses in Nepal are not exceedingly costly. Furthermore, I have a scholarship that pays for both of them. It’s easy to say that I live in Nepal for free. Still, this doesn’t consider the opportunity cost. Without quoting the actual number, I told them my opportunity cost for living in Nepal was very high. I left a job in the oil industry to come to Nepal and study renewable energy. That salary would be considered opportunity cost. Still, things are seldom what they seem at first glance. I reverted back to the cost-benefit analysis we had previously learned. The simple cost-benefit analysis only considers economic costs and economic benefits. For those who know better, we shouldn’t gauge our lives in strictly economic terms. We had also learned to supplant economic benefit with social benefit when appropriate. I explained to the class that while the economic opportunity cost was high for me, the social benefit greatly outweighed the comparatively minor opportunity cost. Without a doubt, the social benefit of studying with them in Nepal was well worth the opportunity costs.

It wasn’t long after this time that two of my friends from Engineers Without Borders came to visit. They were my first American visitors in Nepal. Thanks to a lot of good email communication with Shannon, we had planned out a very eventful week for their short time in Kathmandu. They decided to stay in the tourist neighborhood of Thamel. It was a good idea, since my dorm room would be a tight fit for multiple people, not to mention the lack of hot water. On the first morning I met them, I gave them a small Kathmandu survival package, with wool hats, pollution masks, etc. We sat down to talk in the small café of their hotel. I was quickly reminded of one of the reasons why I enjoyed EWB so much, the company of like minded people. The great conversations continued from the café, all through our walk to a nearby historical monument. The day passed quickly and enjoyably. I had to explain to them that this was essentially a vacation for me too. Most days are enjoyable at the university, but it’s not every day that I visit local landmarks with friends. In the past, I had one local friend who traveled with me to different monuments. Since she had obtained her German work visa six months ago, she had been gone.

On one of the later days, we found ourselves sitting outside my favorite temple in Kathmandu. It is a small temple located outside of the main city, in a rural village. It is completely integrated into the local community, with a health clinic and school in close proximity. The three of us sat and watched the schoolchildren play a game with a tennis ball. We could also see where one of the religious statues had been tied down to its pedestal. Most likely, it had been knocked over by the tennis ball a few too many times. A boy came over to the water tap nearby and took a drink, leaving it slightly running when he was done. Claire turned to me and asked about the running water tap. It was clearly bothering her. She asked if the water source was a spring or a well. What she effectively asked was whether a resource was being wasted or not. It it’s a spring, then it doesn’t matter that the tap is running, the spring would have runoff at the source anyways. If it’s a well, then a finite amount of pumped water is being wasted, at the cost of pumping it to the surface. Just to be safe, I walked over and shut the tap completely. Walking back, I thought to myself, only a sustainable development engineer would consider the water source before worrying about a running tap. Only another sustainable development engineer would understand all the implications behind the simple question, “Does that water come from a spring or a well?” Again, it was nice to be in the company of like minded people.

Throughout the week, I had a wonderful time hosting Claire and Shannon. We visited historic monuments in Kathmandu, had academic discussions about the visible effects of climate change in Nepal, and ate lots of local Nepali and Newari food. I reiterated several times that this week was a vacation for me too. During their time in the tourist area of Thamel, they even found a restaurant that served nachos (I previously decided against writing an entire blog entry concerning my year-long pining for nachos). When it was time for them to go, I took them to the airport. We said goodbye, parted ways, and I returned back to my dorm room. The social vacation was over. It was then that I understood the term “opportunity cost” to its fullest. Before, I had only considered economic opportunity cost, not social opportunity cost. I needed to see it again, to remind me what I had really given up in coming here. I gave up time with my friends and family in the USA. I don’t regret coming to Nepal. Furthermore, after they left I still chose to stay an additional year in Nepal. Regardless, seeing the social opportunity cost is like looking at the ghost of what’s missing.


P.S. Claire and Shannon, thanks for visiting, I had a wonderful time. Thanks for the care package too!