The opportunity cost to defense inputs

This article analyzes the difference between the budgetary expense and the opportunity cost of defense inputs. If inputs are obtained by the government from a market economy with undistorted prices, the price paid for the last unit of each input acquired equals the opportunity cost. However, taxes create a distortion between opportunity cost and unit price. An additional complication, discussed using the case of military personnel, is that pre-marginal units may have an opportunity cost lower than the unit price determined at the margin. Principles used to determine the social discount rate are also discussed in the analysis.