As I was commuting to work this morning, I thought – How much does it cost me to drive to work? Not the gas, the car, and the taxes I pay for the road, but how much does the lost opportunity cost me? If you took Economics in College, you likely learned about opportunity cost.
In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative, i.e. the second best alternative. – Wikipedia
In this post, I am only going to look at opportunity cost, not environmental cost, not social cost, nor other externalities. What does it cost you in lost opportunity to commute to work based on what you know today?
My first example is a couple I know that purchased a house in a location that requires them to commute 1.5 hours to work each way. So they commute 3 hours every workday.
The opportunity cost based on the above definition is the dollar value amount they produce per hour when producing goods and services (this is the economic value of an hour of their time). Since they are skilled technology workers we will set that at $100 per hour for the couple. Since they are both knowledge workers, they don’t need to be in any specific location to be productive, all they need are the tools to be productive, computers, software, and network connections. Based on this information I came up with formulas for the cost of commuting.
(Commute time * Productivity per hour) * Days Commuting per year
(3 * 100) * 230 = 69K
Based on similar formulas I calculated the following numbers:
- Yearly opportunity cost – $69,000
- Lifetime (30 years) opportunity Cost – $2,070,000
- 8-hour work days spent commuting per year – 86.25
- Lifetime (30 years) work days commuting – 2587.5
- Number of work years spent commuting – 11.25
That’s right! They will spend the equivalent of 11.25 work years driving to and from work. I defined a work year as 230 8-hour days.
Using the same formulas these are my numbers based on my 1.25 hour daily commute time.
- Yearly opportunity cost – $28,750
- Lifetime (30 years) opportunity Cost – $862,500
- 8-hour work days spent commuting per year – 36
- Lifetime (30 years) work days commuting – 1078
- Number of work years spent commuting – 4.67
Makes working from home look attractive doesn’t it?