5/10/2021 Cost Benefit analysis Lecture 1 notes What is CBA? - A framework to make social policy decisions - Try to extend the principles of private-firms' CBA to all societal elements - By listing and monetizing the associated costs and benefits to all members of the society - To help social decision making and to increase social value (allocative efficiency) - Impact on society as a whole -> social CBA Focus on policy decisions made by governments, rather than individuals and firms. We will look at it from a social perspective - all of society. - It's a normative tool - Answers heavily dependent on assumptions and models - Two main criticisms 1. Can utility be traded-off across individuals? 2. Can all impacts be determined, monetized, and appropriately valued across time? How things should be done. Not claimed to be a positive analysis. Depend on models and assumptions you make. Decreasing others' utility as a result of increasing others'. Putting values on all costs. Types of CBA - Ex-ante evaluation: before the decision is made Would this policy be a good idea? Done study before been decided. Don't know realised outcomes. - Ex-post evaluation: after a project is completed Was this policy a good idea? After been implemented already. - In medias res evaluation: after the project has begun but before its completion Is continuation of this policy a good idea? Basic steps of CBA - Should the government build a proposed four-lane highway between town A and B? - Step 1: Explain the purpose of the CBA · What is the rationale for considering a change in policy? Why are we thinking about this policy, why are we considering this, problem with status quo? · Prima facie rationales are market or government failures Provide rationale for policy · Existing routes are highly congested, dangerous, and not suited to handle the anticipated increase in traffic volumes · Government is unwilling to impose tolls on existing routes · Widening the roads is not possible
- Step 2: Specify the set of alternative projects · A highway with tolls · A highway without tolls · Compared with the status quo policy - Step 3: Decide who has standing · Study 1: all tax payers in the province (provincial perspective) · Study 2: everyone in the world (global perspective) Status quo - what is happening now. Will they improve social welfare? People from abroad benefit - will also be included. - Step 4: Identify the impacts of the proposed alternative(s), catalogue them and select metrics . users of existing route that will switch to the new highway time saved, reduced costs, increased safety · new users . continued users of the existing routes reduced congestion time · government benefiting from toll revenues · terminal value of the highway . construction costs, maintenance, toll collection, toll booth construction Stronger benefits and costs - Step 5: Predict the impacts quantitatively over the life of the project · determine the "most likely" impact in each period