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Benefit-Cost Analysis BASICs

Benefit-Cost Analysis BASICs. Monetary Measures of Utility. How much is a gallon of gas worth to a person? Expenditure at going price (“value in exchange”) Value above price/expenditure? Suppose you can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market.

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Benefit-Cost Analysis BASICs

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  1. Benefit-Cost Analysis BASICs

  2. Monetary Measures of Utility • How much is a gallon of gas worth to a person? • Expenditure at going price (“value in exchange”) • Value above price/expenditure? • Suppose you can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market. • Q: What is the most you would pay to enter the market? • Q: How would you depict this graphically? • Q: How could you depict this value and the consumer expenditure on a demand graph?

  3. Consumer’s Surplus(with competitive supply) p1 CS = ½* qm(pmax- pm) Expenditure= qm* pmarket MC = Supply “Value in Use” = E + CS = “Impact Study”

  4. Benefit-Cost Analysis Policy Change: Excise tax imposed of $t Deadweight Loss = ½ *(p1-pm)*(qm-q1) CS p1 TaxRevenue t pm Marginal Cost SellerRevenue q1 qm (output units)

  5. Benefit-Cost Analysis Expenditure of tax revenues in Market 2 Added CS + Expenditure = Pm2(q2-qm2) + ½ p2(q2-qm) p2 t pm2 MC qm2 q2 (output units)

  6. General Equilibrium CBA • Preceding graphic provides measure of welfare loss in single market • Total effect takes into account gain in welfare from expenditure of funds in new market(s) • Net Welfare Change in $ = ½ *(p1-pm)*(qm-q1) – P2m(q2-qm2) ½ p2*(q2 – qm2)

  7. Compensating Variation and Equivalent Variation • Two additional dollar measures of the total utility change caused by a price change are • Compensating Variation: the least income that, at the new prices, just restores the consumer’s original utility level? • Equivalent Variation: the least income that, at the old prices, just restores consumer’s utility level

  8. BCA with Pricing PowerProducer’s Surplus Output price (p) Producer Surplus = q1*pm - VC Supply = Marginal Cost pm Producer Variable costs = q (output units) q1

  9. BCA with Pricing Power DeadweightLoss CS pb TaxRevenue t ps PS q1 q0 (output units)

  10. Benefit-Cost Beyond the Basics • GE/Externality Issues (MN Recycling Case) • Are market prices/cost accurate reflection of values? • Markets involved; degree of development; subsidies; secondary costs • Non-market goods • WTP Methods • Hedonic regressions • Implicit Values • Time Valuation • Life Valuation • Future projects • Projections of use/demand for project (see impact studies) • Surveys; Simulations (Portland Traffic case; Seattle Rail) • Projection of impacts on related goods/services • Simulations; Existing studies • Projections of cost • Direct v. Secondary costs • Time Aspects • Discounting rates • Time Horizons • Special Topics—Basis of Big Errors • Impacts Over (under) Estimated (See Impact Study Discussion) • Poor Cost Estimates • Poor Use/Demand Estimates • Double counting: “jobs created” • Market Prices v. Consumer Surplus

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