Which of the following best illustrates opportunity cost in a government budget?

Opportunity cost refers to the value of the next best alternative that is foregone when a choice is made. In the context of a government budget, it illustrates how resources are allocated among various competing needs and priorities.

The scenario of a new school being funded by reallocating funds from public transport perfectly depicts opportunity cost. By choosing to allocate resources to build a new school, the government is effectively forgoing the benefits that would have come from investing those funds in public transport. This decision highlights the trade-off inherent in budgetary choices, as society must weigh the benefits of education against the potential improvements in transportation infrastructure.

The other options do not directly illustrate the concept of opportunity cost in the same way. A decrease in tax rates can lead to increased public spending, but this does not showcase a direct trade-off or the alternatives surrendered. Similarly, an increase in government debt typically indicates borrowing rather than a direct choice about reallocating existing funds, which doesn't illustrate opportunity cost. Lastly, an increase in consumer spending on luxury items is more about individual choices rather than government budgetary decisions. Thus, the first scenario is the clearest depiction of opportunity cost within the context of a government budget.