Do we get back more than we give up?

1. Do we get back more than we give up? Costs are easy- Benefits are hard

2. A complex process with simple steps • What are the costs? • What are the benefits? • How do we compare the future with the present? • How do we compare the costs and the benefits?

3. Counting Benefits and Costs • Only real changes in the well-being of individuals are counted. • “Benefit” and “Cost” depend on the question being asked. • Cost benefit analysis is a single entry accounting system. • “Social Surplus”

4. Don't assume that those who write the checks pay the bills. Costs Costs depend on what we choose not to do Outlays used to purchase resources Benefits foregone Use of the resources in the next best alternative Hidden costs

5. Identifying Costs: Some Rules Transfers are NOT Costs Don’t Double Count

6. Increases in the real well-being of society or an increase in the real production of goods and services for people. Benefits Think opportunities What do we gain?

7. Static v. Dynamic Analysis Initial distribution of costs and benefits What people do in response to the initial distribution.

8. Don't measure benefits by price. We can gent more than what we pay for Valuing Benefits and Costs Market Valuation Consumer Surplus Producer Surplus

9. P wtp P m D Consumer Surplus

10. s P m P wts Producer Surplus

11. Pwtp Pm Pwts Qm Distribution of Costs and Benefits

12. Two keys to benefits and costs P Q P*Q

13. Measuring p (values) • Goods and services valued by market transactions • Goods and services not value by markets • Shadow Prices • Nonmarket valuation techniques • Contingent Valuation • Travel Cost • Hedonic Pricing

14. Measuring q • Depends on context • Forecasts • BPJ • Inverted Analysis • What change would be needed to produce benefits that exceed costs? • Is that change reasonable?

15. 60 20 -20 -60 -100 -140 -180 -220 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Costs Benefits Comparing the Future and the Present

16. Discounting æ ö FV ç ÷ å = n PV ç ÷ = i 1 n ( ) + è ø 1 i

17. The Discount Rate • The OMB-Water Resources Rate • What is the Social Discount Rate? • The long term opportunity cost of capital • Adjustment for Risk • Adjustment for Inflation • INFLATION RULE: IN OR OUT.

18. The Components of the Discount Rate

19. The Effects of the Discount Rate

20. Net present value NPV=PVb-PVc If NPV>0 Net benefits CBR=PVb/PVc If CBR>1 Internal Rate of Return What discount rate yields NPV=0 If IRR>DR Cost Effectiveness Analysis Minimum costs per unit of output (q) No benefits Decision Rule

21. If a change can make at least one person better off without making someone worse off, it should be made. If the results of a given change are that winners can compensate losers and still be better off, the change should be made. Allocational Efficiency Pareto Optimality: Kaldor-Hicks Criterion:

22. Virtues • Forces attention on fundamental economic questions • The resources foregone for the benefits received • Puts cards on the table

23. Vices • Complex • Relies on Assumptions • An Illusion of Precision • Relies on economic principles that are not always easy to explain

24. Politics and Economics Who gets what may be more important than what is there to get

25. Concentrated and visible gains and losses count more than diffuse and invisible Is Cost Benefit Analysis Ethical? Putting a dollar value on everything Equity issues Costs & Benefits v. Transfers Use of the information