A local government has a fixed budget of £12 million\text{£}12\text{ million}£12 million to allocate. It faces a choice between upgrading the local road network to reduce congestion or investing in energy-efficient social housing.
Which of the following statements best describes how the fundamental economic problem and the concept of opportunity cost apply to this scenario?
The opportunity cost of upgrading the road network is the modern monetary expenditure of £12 million\text{£}12\text{ million}£12 million, which could otherwise be held to permanently eliminate scarcity.
Scarcity arises because the community's demands for public services are unlimited while productive resources are limited, meaning the opportunity cost of upgrading the roads is the foregone benefit of the social housing.
Since the £12 million\text{£}12\text{ million}£12 million budget is a direct grant from central government, no real economic scarcity exists, meaning both projects can eventually be built without any trade-offs.
Economic scarcity in this scenario would only arise if both projects failed to generate positive externalities, thereby reducing the net welfare of the local community.
123 exam-style questions on AQA A Level Economics 1.1 Economic methodology and the economic problem, covering 1.1.1 Economic methodology, 1.1.2 The nature and purpose of economic activity, 1.1.3 Economic resources, 1.1.4 Scarcity, choice and the allocation of resources, and 1.1.5 Production possibility diagrams. Each one has a worked solution and a mark scheme showing where the marks go.