Question

Suppose the U.S. President is deciding whether the federal government should spend more on research to find a cure for heart disease. He asks you, one of his economic advisors to prepare a report discussing the relevant factors he should consider. Use the concepts of opportunity cost and trade-offs to discuss some of the main issues you would cover in your report.

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Answer 1

Solution:-

The US government usually has a designated budget for research purposes in the field of medicine. What this implies in terms of the opportunity cost is that the funds available for research of other illnesses/diseases is decreased. Thus, when the government is deciding if they should fund the research for finding a cure for a heart disease, it should consider that the opportunity cost of this research is not high enough. Recalling the laws of supply and demand and how optimal results are achieved at the point where marginal benefits are equal to the marginal cost, the government should adopt this approach and allocate spending for this research to the point where the marginal benefit of the research equals exactly to the marginal cost of it. The government will have to make a trade-off in terms of allocating funds to research for different diseases. An efficient trade-off will be obtained using the above suggestion.

If the federal government has a fixed budget for medical research, then the opportunity cost of funding more research on heart disease is the reduction in funding for research on other diseases. The decision should be made at the margin: to maximize the benefits from government spending on medical research, the last dollar devoted to research on heart disease should result in the same marginal benefit – less disease and fewer deaths – as the last dollar spent on research for other diseases. If the additional funding for research on heart disease comes at the expense of other non-medical research expenditures, then the opportunity cost will change, but a similar analysis should be conducted.