To see these ideas in action, suppose that you and a friend are going to Miami Beach from Boston for spring break. The only question is whether you should drive or fly. Your friend argues that you should drive, because splitting the cost of a rental car and gas “will only cost $200 each.” He tries to seal the deal by pointing out “that’s much better than a $300 plane ticket.”
To analyze this problem using cost-benefit analysis, you need to list all benefits and costs of driving compared to the alternative of flying. Here we’ll express these benefits and costs comparatively, which means the benefits of driving compared to flying and the costs of driving compared to flying. We’ll need to translate those benefits and costs into a common unit of measurement.
From a benefit perspective, driving saves you $100—the difference between driving expenses of $200 and a plane ticket of $300. We sometimes refer to these direct costs as “out-of-pocket” costs. But out-of-pocket costs aren’t the only thing to consider. Driving also costs you an extra 40 hours of time—the difference between 50 hours of round-trip driving time and about 10 hours of round-trip airport/flying time. Spending 40 extra hours travelling is a cost of driving, even if it isn’t a direct out-of-pocket cost. The opportunity cost of time is $10 per hour.
What is the net benefit of flying and driving? Would you explain please?