Applied welfare econ cost benefit analysis ch1

Applied Welfare Econ & Cost Benefit Analysis
Chapter 1
Introduction to Cost-Benefit Analysis


What is CBA?






A AAT HD
A F DAR HATARAANANA AAAAAL AAATA ANA
AANA FATA
At is a pl ic
A ass essm ent m et h d t ha
t
qu ant ifie
s t hev alu e  f pl ic
A
AnsAquAnAAs (usuAllA AAllAA AmpAAtsA
An mnAtArA tArms t All m em be
rs  f
sAAAtA
A AAA AAlAulAtAs nAt sAAAl AAnAAAts ( NAAA
fr each pl icA alt ern at iv eA n et s cial
AAnAAAts AquAl sAAAl AAnAAAts ( AA mAnus
sAAAl Asts ( AAA NAA = A A A

Two Arguments Against CBA
Am e disput e t he
fun dam ent al assumpt ins  f AAAA
 tA A t tA A
sum A A nA A vA A uA l
ut il itA s hul d bem ax im ized
an d
t ha
t n e ca
n tr ade
 ffut il itA
gains an d lss es amn g p epl e
(sm e ls e sm e gai
n mr e= > AK!A
 TA A A A rA uA
tA A t tA A rA A s n
t he
r et ica
l ba
s is fr m ai
A gn a tr deA
AAs AAtwAAn nA pArsn’s AAnAAAts
AnA AntAAr pArsn’s Asts


Two Arguments Against CBA
Au bl icpl ic
A p art ici
p ants di
s agee

r
abut sp ecific issu es in AAAA su ch asA
 h
w t mn et ize csts an d ben efits
 wAAt AmpAAts ArA (AspAAAAllA vAr
t im eA
 wAAtAAr An AmpAAt As A Ast r A
AAnAAAt
 h
w t m ae
A a tr deA ffs betw een t he
prAsAnt AnA tAA AuturA


PURPOSE AND USES




T help effect iv e s cial
decis in m ai
A gn h t gru h AAAAAAAnt
all cat in  f s cietA’s r esur ces
wAAn mArAAts AAAl ( mArAAt AAAlurAA
A hen m arA ets fail an d
r esur ce
s ar e us edin efficie
ntlAA AAA
can be us ed t cl ar ifA w hich  f t he
ptAntAAl AltArnAtAvA prArAmsA

pl icie
s r prA ec
ts ( in clu dig
n t he
stAtus quA As tAA mst AAAAAAAnt
(AlsAst t AAAAAAAntA


Types of CBA:








Ax ant e AAA – cn du ct edpr ir t t hepl ic
A
int erv ent inA Us eful t s hw w het her
r esur ce
s s hul d beus edn a pr gr am r
prA ec
t
Ax pst AAA – AnAuAtAA At tAA AnA A tAA plAAA
int erv ent inA Arv ides in frm at in abut
tAA pArtAAulAr AlAss A AntArvAntAn
An m edia
s r es AAAA cn du ct eddur in g t hepl ic
A

AntArvAntAn
AmpArAtAvA AAA – AmpArAs tAA A x AntA
prAAAAtAns t A x pst rAsults Ar tAA sAmA
prAAAt (vArA AAw A tAAsA AmpArAsns AAvA AAAn
AnAuAtAA AAAAusA tAA AlAAnts A A x pst AnAlAsAs
ArA AAAAArAnt Arm tAA AlAAnts A A x AntA
an alAs esA


Project-specific Decision Making




Ax ant e an alAs is is mst
us ef
ul fr m ai
A gn e r csur e
all cat in decis ins
An m edias r es AAA an alAs is
can als be us ed fr t his
purps eA but ex pst an alAs is
As t lAtA t AAvArt
rAsurAAs t AltArnAtAvA
us esA


Learning About the Value of the
Specific Project




Ax pst A nA lAsA s A s tA A
mst usAAul Ar lAAnA At
tAA AAAAAAAnAA A A pArtAAulAr
prA ec
tA t he
n in m edia
s r esA
tAAn Ax AntA
TAA rAAsn As tAAt mrA As
lAArnAA AAut tAA AAtuAl
AmpAAts A tAA prAAAt As tAmA
AAs AA


Learning About the Potential
Benefits of Similar Projects




Ax pst an alAs is als prv ides
in frm at in abut t he pr babl e
csts an d ben efits  f s im il ar
AuturA AntArvAntAns
T heamunt  f l ea
rn in g de
p en ds

n tAA rAprAsAntAtAvAnAss A tAA
p art ic
ul ar prA ec
tA ie
A hAA Aw
gen er al izabl e t he prA ect it is
t t he
r prA ec
ts r l ar ge
A
sAAlA prAAAts


Learning About the Efficacy of CBA






A furt h tAp e  f an alAs is
cmp ar es Ax AntA AnAlAsAs t
AAtAAr in m edias r es r Ax pst
AnAlAsAs
TAAsA AmpArAsns prvAAA
in frm at in abut t he accur acA
A Ax AntA AAAs
TAAsA AmpArAsns Als AAlp ur
un de
rst an dig

n  f pr edic
t in
Arrr


THE DEMAND FOR CBA







A anA cuntr ie
s nw m an da
t e AAAs (r r el at ed
t ech
n iqu esA pr ir t t heen ac
tm ent  f
v ar ius pr gr ams r r eg
ul at ins
An t heUAAA fr ex ampl eA v ar ius ex ec
ut iv e
r de
rs an d ac
ts r equ ir e a AAA t becn du ct ed
prAr t nAw rAAulAtAns
T heUK r equ ir es prA ec
t appr ai
s al

AAAs ar e als in de
m an d becae
us  f ci
t ize
n
rAsAstAnAA t nAw tAxAs (ArAAnA AvArnmAnt
t At lAAst AnsAAAr mrA AAAAAAAnt plAAAAsA
AnA AnArAAsAA AnAArn Ar tAA AnvArnmAnt
(t AnsurA tAAt tAA vAluAtAn A
AnvArnmAntAl AmpAAts ArA AnAluAAA An tAA
AAAAtAs AnA AAAAsAnsA


THE COST OF CBA
T he pr cess  f AAA t ae
A as mA nA
r esur ce
sA
 an alAt ic t im e
(pprtun itA cstA
 sA ill ed hum an cap it al
(pprtunAtA AstA
 AnA mnAA (wAAAA rAprAsAnts tAA
pprtun itA cst  f t he
r
sAArAA Anputs t tAA AnAlAtAA
prAAssA


BASIC STEPS OF CBA

At ep A AA Ap ecifA t he s et  f
alt ern at iv e prA ects
T her e ar e usu allA a hu ge num ber  f
pt ent ia
l alt ern at iv e prA ec
tsA fr
ex ampl eA n dim ens ins w it h A pss ibl e
v alu es = An alt ern at iv esA
A in im allAA t he AAA cmp ar es t he n et
sAAAl AAnAAAts A tAA prAAAt wAtA tAA
nAt sAAAl AAnAAAts A A AAptAAtAAAl
prAAAt (r spAAAAAA prAAAt AA tAAt As
w ha
t wul d bedi
spl aced
A t ha
t wul d be
AAsplAAAA AA tAA prAAAt wulA prAAAAA
TAAs AAptAAtAAAl prAAAt As AAllAA tAA
AuntArAAAAtuAl AnA As usuAllA tAA
stAtus qu


BASIC STEPS OF CBA
At ep A AA Decide
w hs e beefi
n ts an d csts cunt
(st an dig
n A
AtAnAAnA AAtArmAnAs wAsA AAnAAAts AnA Asts wAll

cuntA
At an dig
n is usu allA mst apprpr ia
t elA
spAAAAAAA At tAA nAtAnAl lAvAlA
TAArA As AntAntAn As t wAAn stAnAAnA sAulA
AA spAAAAAAA At tAA AlAAl lAvAlA
Am e fa
vr gl ba
l st an dig
n A esp ecia
llA w hee
r
tAArA ArA AntArnAtAnAl spAllvArs (AAAAA
Ar mAnA AnvArnmAntAl AssuAsAA
Fr t her A in ds  f prA ectsA sm e adv cat e
stAnAAnA At A lwAr lAvAlA suAA As
st at eAprv in cer l ca
l gv ernm entA


BASIC STEPS OF CBA
At ep A AA A at al g t heimp ac
ts an d s el ec
t m ea
sur em ent
AnAAAAtrs
L ist t hep hAs ica
l imp ac
ts as beefi

n ts r csts an d
sp ecif
A t heimp ac
ts un itsA
Amp ac
ts in clu debt h inputs an d utputsA
AAA an alAsts s hul d nlA in clu deimp ac
ts t ha
t affec
t
AnAAvAAuAl utAlAtA A AumAn AAAnAsA
AlsA t hee
r must bea ca
us e an d effec
t r el at ins hi
p
betw een prA ect ut cm e an d t he in div idu al’s
utAlAtAA
Nt eA A ew ar e imp ac
t ca
t eg
r ie
s t ha
t m aA bev alu edin
ppsAtAlA AA AAAAArAnt AnAAvAAuAls (AAAAA smA
AnAAvAAuAls vAAw tAA AmpAAt As A Ast wAAlA tAArs
v ie
w it as a beefi
n tAA An su chcic
r umst an ce

sA it is
AtAn mrA usAAul t ArAAtA tw sApArAtA AmpAAt
AAtAArAAsA AlsA nAturAl mAAsurAmAnt unAts mAA
nt befea
s ib
l e ( ie
A cA ir em as iv ded
AA in su chca
s esA
surrAAtA AnAAAAtrs AAn AA usAAA


BASIC STEPS OF CBA
At ep A AA Ar edict t he imp acts
qu ant it at iv elA v er t hel ife
 f t he
prA ec
tA
ArA A A A tA n A s A A A A A A ultA AupplA
AnA AAmAnA AurvAs usuAllA ArAn’t
AnwnA t hi
s m ae
A is ht ar d t qu ant if
A
imp acts accr din g t t he
cn ceptu allA crr ect m et h dA An
gen er alA it’s mr e difficult t
prAAAAt AmpAAts AA tAA prAAAt AAs A
ln g t im e hr iz
n r ift he

r el at ins hi
ps be
tw ee
n v ar iab
l es ar e
AmplAxA


BASIC STEPS OF CBA
At ep A AA An et ize ( att ach dll ar v alu es
tA all imp ac
ts
An AAAA v alu e is m easur ed in t erms  f
“w ill in gn ess t p aA” ( bt aied
n
frm de
m an d
curv esAA A anA imp acts ar e difficult t v alu e in
AllAr tArms AAAAusA tAAA ArA nt trAAAA An
m arA ets ( ie
A iA l feAA A f n in di
v id
u al is w ill in g
t p aA fr an imp ac
tA it ha
s a A v alu eA
At ep A AA Dis cunt ben efits an d csts t
AtAAn prAsAnt vAluAs
AmpA A ts A rA A A sA untA A A A A A usA A lmst
AvArAAAA AAs A prAAArAnAA Ar AnsumptAn nw

rAtAAr tAAn lAtArA TAA ApprprAAtA AAsAunt
vAluA mAtAA AnA lAvAl As AntAntAusA At As
AAsAussAA AxtAnsAvAlA An suAsAquAnt AAAptArsA
A ft en t her at e is m an da
t edbA a gv ernm ent age
n cA
rAspnsAAlA Ar AAnAnAAAl AnA AuAAAtArA vArsAAAt
Ar tAAr AvArnmAnt AAAnAAAsA


BASIC STEPS OF CBA
At ep A AA Amput e t he n et pr es ent
v alu e  f each
alt ern at iv e
TAA nAt prAsAnt vAluA ( NAVA equ als
t hepr es ent v alu e  f beefi
n ts m inus t he
pr es ent v alu e  f cstsA

NAV = AV (AA – AV(AA
AA sA tA A A ltA rnA tA vA wA tA tA A
l ar ge
st NAVA T he alt ern at iv e w it h
tAA lArAAst NAV A t lA A st rA prA sA nts
A mrA AAAAAAAnt AllAAtAn A
r esur ce
sA An e ca
n’t s aA it’s t hemst
AAAAAAAnt AllAAtAn AAAAusA nt All
pssAAlA AltArnAtAvAs ArA nAAAssArAlA

an alA zed in t he AAA


BASIC STEPS OF CBA
At ep A AA A er frm s ens it iv itA an alAs is
T her e is usu allA cns ider abl e
unAArtAAntA AAut AtA prAAAAtAA AmpAAts AnA
t hei
r apprpr ia
t e mn et arA v alu at inA
A ens it iv itA an alAs is cl ar ifie
s fr deci
s in m ae
AArs
hw t hes e un cert aint ies affect t he AAA r esultsA
Just AAut AvArA vArAAAlA AnA AssumptAn
can be su be
A et
c d t s ens it iv itA an alAs isA but
tAmA AnA rAsurAA AnstrAAnts lAAA AnAlAsts
t AAus n tAA mst AmprtAnt vArAAAlAs
r AssumptAnsA
At ep A AA A ae
A a e r cmm en dat in
NrmA llA rA A mmA nA tA A A ltA rnA tA vA
w it h t hehigheNAVA
st
Aut Als tAAA Ant
AAAunt sAnsAtAvAtA AnAlAsAsA

BUREAUCRATIC AND
POLITICAL “LENSES”






Hv ernm ent emplA ees hav e a
t en dec
n A t s ee“ csts” an d “ beefi
n ts”
frm an in div idu al s el fA int er est ed
pArspAAtAvA r Arm A vArAAtA A
agen cAA i
ent er est d p ersp ect iv e
TA A A A A nA A pA rspA A tA vA s A rA
bas ed n t he sp ecific r gan izat in al
rlA A tAA AvArnmAnt AmplAAA
TAA tArAA ArAAAtApAl pArspAAtAvAs ArA
tAsA A AuArAAAnA spAnAAr AnA AnAlAst
(w hich w e w ill adptA


The Guardian Perspective








Hu ar dians v iew prA ects frm a
r ev enu ee
A exp dn itur e p ersp ec
t iv e ( ie
AAA
r ev enu e in flws = “ beefi
n ts”A exp en di
tur e
ut flws = “ csts”A
hav e a t en den cA t r egar d AAA as
nAïvA AnA AmprAAtAAAl AnA As A tl A
spAnAArs
A ersnn el in l in e agen cies m aA
vAAAllAtA AAtwAAn A spAnAAr AnA AuArAAAn
pArspAAtAvA AApAnAAnA n tAA plAtAAAl
AnA AuAAAtArA AlAmAtA
Fin an cial cntrl p ersnn el in
lAnA AAAnAAAs tAnA t AAvA A AuArAAAn
pArspAAtAvA


Some consequences of the guardian
perspective:











At dwnpl aAs r ignr es nnA fin an cial
s cia
l beefi
n ts (t im e s av ed
A l iv esA et cAA an d csts
(tAmA spAntA pllutAnAA
At int erpr ets t he m ean in g  f “ csts”
idisAn cr at icallA ( an d in crr ectlA!AA eg
A eAA r gar din g
tAA Ast A lAAr – AuArAAAns AAus n AAtuAl wAAA
r emun er at inA w hi
l e AAA f cus es n t he
pprtunAtA Ast A tAA lAArAA
RAsurAAs wnAA AA AvArnmAnt tAnA t AA vAAwAA As
ArAA AAs (rAtAAr tAAn AAvAnA An pprtunAtA
AstAA
At AAnrAs tAsA Asts nt ArnA AA Ats wn lAvAl
A AvArnmAntA
At trAAts suAsAAAAs Arm tAAr lAvAls A
AvArnmAnts As “AAnAAAts” (tAAA ArA A rAvAnuA
AnAlwAA
At wA nts t usA A A A A A sA A A l A A sA unt rA tA

– s im il ar t a fia
n n cia
l m arA et di
s cunt r at e
(usuAllA AAAAAr tAAn tAA sAAAl AAsAunt rAtAAA


The Spender Perspective













T he sp en der p ersp ect iv e is usu allA fun d in
s erv ice
r l in e de
p artm entsA Am e cns equ en ce
s  f t he
sp en de
r p ersp ec
t iv e ar eA
Axp en ditur es n cnst itu ents ar e v iew ed as

“ beefi
n ts” r at he
r t ha
n cstsA
Tr ans fers ( frm a AAA p ersp ect iv eA r eceiv ed bA
AnstAtuAnts ArA vAAwAA As “AAnAAAtsA”
Am e csts (su ch as wrA ers’ w agesA ar e v iew ed as
ben efitsA t his  ft en m eans supprt fr anA prA ect
rAtAAr tAAn A “A ntAAnA” stAtus quA
Ut il ized r esur ces t hat ar e wn ed bA
AvArnmAnt ArA vAAwAA As AAvAnA n AstA
L ar geA cap it alA int ens iv e prA ects w it h big
sunA Asts ArA AAvrAAA TAAA ArA AArAAr t AAnAAl lAtAr
nA
TAAA tAnA t vAAw mArAAt AllAAtAns As AnApprprAAtAA
AnA A nt AAAApt tAAt prAAAt rAsurAAs ArA AAvArtAA
Arm tAAr prAuAtAvA usAsA
TAAA AAvr lw AAsAunt rAtAs (AAAAusAA AlAAnA
AvArAtAAnA AlsA AnstAntA tAAs rAAsAs tAA NAVAA


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