I understand opportunity cost but I lose marks when I use it. What am I doing wrong?

Almost certainly this: you are defining it rather than applying it. "The next best alternative forgone" earns a definition mark once. After that, examiners want to see you use the idea to reach a conclusion the question asked for.

The move that scores

Opportunity cost is a comparison tool. Whenever a scenario involves choosing, the strong answer names what was given up, not just what was chosen.

A government spends 2bn on a new hospital. The weak answer says there is an opportunity cost because resources are scarce. The strong answer says the 2bn could have funded a specific alternative — schools, transport, debt repayment — and that whether the hospital is the better choice depends on which generates more welfare over what period.

Notice the second version makes the comparison concrete and then sets up an evaluation. That is two or three further marks from the same concept.

Where students apply it too narrowly

Opportunity cost is not only about money. It applies to any scarce resource, and questions deliberately test the non-financial versions:

• Time. A firm's management attention spent integrating an acquisition is attention not spent on its existing products.
• Land. Farmland used for housing is not available for food production.
• Capital. Machinery committed to one product line cannot be switched quickly to another, which is why sunk costs and opportunity costs behave differently.

A question about a free resource is usually testing exactly this: if something has no alternative use, its opportunity cost genuinely is zero, and saying so is the mark.

The trap with sunk costs

These get confused constantly. A sunk cost has already been spent and cannot be recovered, so it has no opportunity cost and should not affect the decision.

A firm has spent 500,000 developing a product and must decide whether to spend 200,000 more to launch it. The 500,000 is irrelevant to that decision. The question is only whether the 200,000 is better spent launching this product or doing something else with it.

Students who include the sunk cost in the comparison reach the wrong conclusion and lose the evaluation marks. Examiners put this in scenarios on purpose, usually with a sympathetic detail about how much work has already gone in.

Using it in evaluation

The highest marks come from questioning the comparison itself. Opportunity cost assumes you can identify the next best alternative and value it, and in practice both are difficult, especially for governments weighing outcomes that are not priced.

Saying that — with reference to the actual decision in the question — is the difference between a competent answer and one that reaches the top band.