© Harry Campbell & Richard Brown School of Economics The University of Queensland BENEFIT-COST ANALYSIS BENEFIT-COST ANALYSIS Financial and Economic Financial and Economic Appraisal using Spreadsheets Appraisal using Spreadsheets Ch. 6: Referent Group Benefit-Cost Analysis Referent Group Net Benefits What is the “referent group”? - it is the group whose net benefits are relevant to the decision-maker who commissioned the SBCA. What will the referent group normally consist of? - all residents of a region, state or country - all members of a social group, for example, pensioners, native peoples etc. If only referent group benefits are relevant, why bother to calculate efficiency net benefit? • Efficiency net benefit is the aggregate net benefit for the project as a whole, using opportunity cost as efficiency prices. • This relationship provides a check on the consistency of the BCA as a whole. • The sum of referent group and non-referent group net benefits must equal the efficiency net benefit. Recall Figure 1.3: C (=referent group net benefits not captured by market prices) B (= non-referent group net benefits) A (= referent group net benefits) D = non-ref. group non-market net benefits (we add segment D) Why do we need BCA to identify referent group net benefits? • A project evaluation will only capture benefits and costs which are fully measured by market prices. It fails to capture various public interest aspects of a project. For example: - employment benefits - indirect tax revenue changes - pollution costs etc. Four-way Classification of Net Benefits Net benefits accruing to: Referent Non-referent Group Group Captured A B by market prices Not captured by C D market prices Figure 6.1: Classification of Net Benefits Graphical Representation of Classification In specific cases some of the cells in the four-way classification can be empty. For example, in figure 1.3 cell D was empty (and was omitted from the diagram) because there were no non-referent group net benefits that were not captured by the market. • Such net benefits might have resulted from global pollution or from market imperfections in the foreign country. In general, what cells in the four-way classification could be empty? 1. If C+D is empty, then the project analysis coincides with the efficiency analysis. 2. If A+C is empty, then the project has no relevance for the Referent Group. 3. If B+D is empty, the non-referent group is not affected by the project. 4. If A+B is empty, the project does not involve any inputs or outputs traded in the market. How do we identify the various categories of disaggregated Referent Group net benefits? 1. Follow the financial flows: - division of project profits between referent and non-referent group members; - identify direct and indirect tax flows, e.g. business income tax, sales tax, tariffs etc. 2. Learn from the shadow-prices: - where there is a shadow-price, the project analysis has failed to pick up an efficiency net benefit that must be assigned to either the referent or non-referent group. [...]... vaccination To Recap: How do we approach BCA? 1 Do the project analysis first (A+B) because of availability of data 2 Do the private analysis, i.e identify the subset of A+B that affects private equity-holders 3 Do the efficiency analysis (A+B+C+D) using shadow-prices and non-market valuations where appropriate 4 Calculate aggregate Referent Group net benefits: (A+B+C+D) - (B+D) = (A+C) 5 Calculate disaggregated...Figure 6.1: Using Shadow-prices to Identify Referent Group Benefits or Costs Input Output Market Price Greater than Shadow-price Benefit to the Owner of the input eg unemployed labour Cost to public or Government eg loss of tariff revenue, cost of pollution . using Spreadsheets Ch. 6: Referent Group Benefit-Cost Analysis Referent Group Net Benefits What is the referent group ? - it is the group whose net benefits. The sum of referent group and non -referent group net benefits must equal the efficiency net benefit. Recall Figure 1.3: C ( =referent group net