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Analyzing opportunity costs to help instead of hurt

By Sarah Schott
web posted January 2, 2017

Walmart has sprung up in many countries including Chile, China, and Mexico. With little competition, it has flourished. However, the competition in Germany by Aldi could not be met by Walmart, so they have begun to focus on expanding into other countries. Customers in China bring with them cultural ideals and mesh them with purchasing from Walmart. “Always Low Prices” is not as readily accepted by the Chinese. For example in China, if prices are low, they question whether the food is spoiled. If items stay on sale too long, they worry if there’s something wrong. Fresh food is also very important in Chinese society so Walmart has begun selling fresh fish in which the customer can sift through piles of fish with their hands and inspect the meat. “They will study the fins – are they firm? The eyes are inspected – do they bulge?” One customer reports, “If it’s good, then I will buy it. If it’s only cheap, I won’t buy it.”

When looking at the Chinese Walmart, one might notice the opportunity cost the company has taken. If they cater to the cultural ideals, Walmart will have to increase their prices because purchasing wholesale fresh food is more expensive than purchasing canned food to sell. If Walmart chose not to buy fresh food, but instead just sold what they could cheaply purchase for retail sale, then they would risk losing customers. In both cases they would lose something, yet one choice would be better than the other.

In an article, Nobel Memorial Prize winner, Ronald Coase, wrote an article titled A New Approach to Understanding Social Costs. In his article he brings up the situation where a factory that produces much smoke, damages surrounding individual’s property. What is to be done to the factory? Many would say to tax the factory for the amount of produced smoke. Yet does this decision have both the factory’s and the individual’s best interest in mind? Coase states, “We have to bear in mind that a change in the existing system which will lead to an improvement in some decisions, may well lead to a worsening in others.” What might happen if due to the tax, the factory might have to lay off workers or cut wages? Employment would go down. This would lead to a decrease in consumption because the people would have less income. Therefore there would be a decrease in aggregate demand.

Coase states, “We should have a regard for the total effect.” According to Coase’s opinion, Walmart made the right choice in deciding how to market to the Chinese. The cost of choosing to pay a higher price to obtain wholesale fresh fish is much lower than what they cost would be if Walmart lost their business in China. I definitely agree with Coase’s opinion because one needs to be able to help the economy as a whole without hurting an aspect of a company due to selfish interests.

In my opinion, we cannot be selfish in our choices if we want for the economy to grow as a whole. While the economy does function well because of self-interest, decisions made by the government to restrain companies are not only going to hurt the company but also the people who depend on that company. Coase claims that what has to be decided is “…whether the gain from preventing the harm is greater than the loss which would be suffered elsewhere as a result of stopping the action which produced the harm.” ESR

Sarah Schott is a junior in high school. © 2016 Sarah Schott

 

 

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