Cost Benefit Analysis - Mishan & Quah 3. Proposals for Weighting Money Valuations · impact on distribution of welfare has led to measurements changing from money to utility i.e. each dollar gain or loss corresponds a particular marginal utility. Higher the income group the lower the marginal utility of a dollar gain or loss. · Using tax brackets to correspond with marginal utilities. Splitting the economy into two tax brackets, rich pay 80p and poor pay 10p. We may infer that 80p for the rich has a utility of 10p for the poor. · Third method of weighting is to calculate the set of weights as a ratio between income groups and average national income. . No matter how accurate the set of utility weights are, their incorporation into a CBA does not in general serve the purpose for which they are designed - to promote equity. CBA cost benefit criterion could still allow projects that allow rich to get richer and poor to get poorer if the rich proportionally richer. 7. Introduction to the compensating variation · Compensating variation: this measures the largest sum a person is willing to pay for a good (or removal of a badtti · Equivalent variation: this measures the smallest sum a person will accept to forego a good (or accept a badtti · Both measures an individuals gain or loss of their welfare . More generally, CV can be defined as the sum of money paid or received by the individual following the movement from state 1 to state 2 that would exactly maintain that individuals original level of welfare 8. Measurements of Rent · Rent may be defined as the difference between what the owner of factors of production earns by employing his factors in producing some current goods and the minimum sum he would accept to keep them there · In tandem with consumer surplus except an increase in consumer surplus is a measure of gain in welfare for a fall in the prices of goods whereas has an increase in rent is the measure of his gain in welfare for a rise in his factors of production . Any rise in the rent of the land is to be entered on the benefit side of the scheme
11. Opportunity cost of labor · Opportunity cost of labor is the valuations foregone when the materials or factors are transferred from other employments · Opportunity cost of labor much take into account occupational preferences and may take into account cost of movement of worker . Absence of the above and opportunity cost of labour is the value of amount of good x it can produce from which it was transferred - = to the marginal product of good x . This value must be adjusted to make allowances for externalities of the production of good x. · Virtually impossible to assign land an opportunity cost - so we use the social value of the land in its current use 12. Opportunity cost