A Primer for Benefit-Cost Analysis
Format: PDF / Kindle (mobi) / ePub
Benefit-cost analysis (BCA) is the best technique for analyzing proposed or previously enacted projects to determine whether undertaking them is in the public interest, or for choosing between two or more mutually exclusive projects. An introduction to BCA for students as well as practitioners, this accessible volume describes the underlying economic theory and legal and philosophical foundations of BCA. BCA provides an objective framework around which discussion, correction and amendment can take place. Stated simply, it is the calculation of values for all the inputs into and outputs from a project and then the subtraction of the first from the second. The authors' goal here is to take the mystery out of the process. They discuss practical issues of market-based valuation and aggregation, non-market valuation, practical applications of general equilibrium models, issues in discounting, and the impacts of risk and uncertainty in BCA. They also provide a list of resources and case studies looking at ethanol and the use of cellular phones by drivers. Straightforward in style and cutting-edge in coverage, this volume will be highly usable both as a text and a reference. Advanced undergraduates and masters students in public policy, public administration, economics and health care administration programs will find this a valuable resource. It will also be of great use to agencies that perform benefit-cost analyses.
friendship, in principle, has been neither missed nor undervalued by BCA. 12 13 The criticism is elegantly expressed by Lumley (1997, p. 72): ‘[I]f a single discount rate is applied to environmental resources, the implications of non-monetary aspects of those resources are often ignored for these intangible factors are the ends to which money is not a means’. Sunstein (1997, p. 81) notes: ‘[W]e may believe that goods are comparable without believing that they are commensurable’. I would say
that much cheese, the correct value for this benefit is probably less than the cash equivalent of $2000.2 As another example, consider a public housing project3 that provides housing equivalent to privately supplied housing that is valued at $1500/ month. It might be tempting to attach a value of $1500/month to the project’s units. However, this will only be appropriate if the resident, if given $1500 per month, would spend it all on housing. If the same person were given 1 2 3 Five pounds of
project on social welfare. Of course most projects aﬀect numbers of people suﬃciently large to make even this simplified version of social welfare practically impossible to implement. The next subsection will discuss several assumptions that are necessary for practical BCA. Some Special Simplifying Assumptions Were they practical, the methods discussed in the previous subsection would allow an analyst to determine the impact of a project on social welfare and, as a result, correctly assess
purposes including heating, cooking, and running a hot water heater. Farmers use propane to dry damp grain. A smaller fraction of customers use propane solely for unessential or less essential amenities such as heating a swimming pool or operating a fireplace. Residential consumers of propane also tend to earn lower levels of income with approximately 63 percent earning less than the Canadian median income. The relatively high cost of switching to different fuels makes it difficult to change to
cost rises to the supported price, but this quantity is likely to be larger than the quantity demanded at the supported price and the marginal cost of production will be greater than consumers’ marginal value for the final unit produced. The appropriate price to apply to an input subject to a price floor may have little to do with the supported price. The important question is likely to be what would have happened to units of the input had they not been used in the project. It is also important