Applied welfare econ cost benefit analysis ch1

Applied Welfare Econ & Cost Benefit Analysis Chapter 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 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 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 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 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 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 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 t wul d bedi spl aced A t 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 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 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 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 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 NEXT AANAAATUAL FAUN DATAANA A F AAATAAANA FAT ANALYAAA RAA D A HAATAR A A ae A e sur f t in d Aur l d Antr an d A ic r bAs J ... 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... 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