Cost-Benefit Analysis: Basic principles. PLCY 201. Basic idea of Cost-Benefit Analysis (CBA). Benefits of a program: +$$$ Costs of a program: - $$$ _______ Net benefits: ? $$$. CBA in the legal framework.
Circular No A-94: 10
“The principle of maximizing net present value of benefits is based on the premise that gainers could fully compensate the losers and still be better off. The presence or absence of such compensation should be indicated in the analysis. “
6. Identifying and Measuring Benefits and Costs. Analyses should include comprehensive estimates of the expected benefits and costs to society … . Social net benefits, and not the benefits and costs to the Federal Government, should be the basis for evaluating government programs or policies that have effects on private citizens or other levels of government. …
6. … Social benefits and costs can differ from private benefits and costs as measured in the marketplace because of imperfections arising from:
(i) external economies or diseconomies where actions by one party impose benefits or costs on other groups that are not compensated in the market place;
(ii) monopoly power that distorts the relationship between marginal costs and market prices; and
(iii) taxes or subsidies.
1. Decide whose benefits/costs count (standing)
2. Select portfolio of alternative projects
3. Catalogue potential (physical) impacts and select measurement indicators
4. Predict impacts over life of project; monetize impacts
5. Discount for time to present values
6. Sum [add benefits-costs over time] and recommend alternative
i.e. Who has standing?
alternative routes -> lives, time etc
construction -> material, labor, land
maintenance -> labor, material
A. Predict impacts
hourly wage ($11.80 in 2004)
40-60% of average income
25% of income
Project 1: Costs 1 m
Benefits 10 m 9m 10
Project 2: Costs 10 m
Benefits 30 m 20m 3
Don’t use B/C!!
Kaldor-Hicks: no distributional concern
Modified benefit-cost analysis: introduce weights.
(if not, can still be useful as a component of multi goal analysis)