An Opportunity Cost View of Fixed Asset Theory and the Overproduction Trap

Marc A. Johnson and E. C. Pasour

American Journal of Agricultural Economics, 1981, vol. 63, issue 1, 1-7

Abstract: In fixed asset and exit barrier theories, durable asset valuation is based upon acquisition prices, yielding downwardly biased rate-of-return estimates and erroneous implications that excess resources become trapped in production when product price expectations fall. Conventional asset valuation based on opportunity cost shows that excess resource applications are incompatible with rational producer behavior. Market failure conclusions of overproduction trap models are shown to be unfounded. A review of recently published agricultural economics texts illustrates how use of fixed asset theory in the college classroom obscures the concept of choice-influencing cost and the rule of resource allocative efficiency.

Date: 1981
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