2 Implicit and explicit costs List the basic costs of owning

2. Implicit and explicit costs List the basic costs of owning and operating an automobile. Which are explicit costs? Which are implicit costs? Does driving an automobile impose any external costs on the economy as a whole that do not show up on your list as either implicit or explicit costs? If so, what are they?

Solution

The basic costs of owning and operating an automobile include the following

The costs listed above are all explicit costs because these costs require the firm to pay out some money and hence they are called explicit costs.

Implicit costs are the firm\'s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment . For example the firm could have invested the money in a bank that pays interest instead of buying an automobile. The interest lost due to investing the financial resources in an automobile constitute the opportunity cost.

Driving an automobile imposes external costs on the economy in the form of pollution that emanates from operating the automobile, the wastage that results when the vehicle is scrapped etc .