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CH 12 Cost-Benefit Analysis

Intro to Public Policy- Charles Wheelan
by

Kalinah Sanchez

on 14 June 2013

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Transcript of CH 12 Cost-Benefit Analysis

Side B
Side A
12.4 VALUE OF A STATISTICAL LIFE
In projects that may directly impact human lives both lost or saved, analysts or policy makers utilize Shadow Pricing tools to determine the monetary value of each life and conduct a cost-benefit analysis of the policy.
COST-BENEFIT ANALYSIS
12.2 MAKING A DECISION USING COST-BENEFIT ANALYSIS
A public project or policy ought to "expand society's net resources." A good policy should anticipate social benefits that exceed the social costs.
12.3 VALUING INPUTS & OUTPUTS
12.6 SENSITIVITY ANALYSIS
Sensitivity Analysis
: the process of evaluating how the analysis is affected by changes in some of the key assumptions
12.7 COST-EFFECTIVENESS ANALYSIS
Ranks policies based on their costs for achieving some defined objective
Evaluates efficiency of various options for achieving certain outcomes or goals.
Not to be mistaken for determining the "worthiness" of a project
CHAPTER OUTLINE
12.1 Basic Tools of Cost-Benefit Analysis
12.1.1 Establishing Common Units, or "Monetizing"
12.1.2 Present Discounted Value (Net Present Value)
12.1.3 Evaluating Uncertainty
12.1.4 Opportunity Cost versus Cash-Flow Accounting
12.1.5 Economic and Noneconomic Values (use and nonuse values)
12.2 Making A Decision Using Cost- Benefit Analysis

12.3 Valuing Inputs and Outputs
12.3.1 Tradable Goods
12.3.2 Shadow Pricing
12.4 Value Of A Statistical Life
POLICY IN THE REAL WORLD: Putting a Number on Life

12.5 Choosing A Social Discount Rate

12.6 Sensitivity Analysis
12.7 Cost-Effectiveness Analysis

12.8 Conclusion
FOR DISCUSSION: The Grief Factor
12.1 BASIC TOOLS OF COST-BENEFIT ANALYSIS
12.5 CHOOSING A SOCIAL DISCOUNT RATE
Policy makers must address how to compare today's social costs and benefits in comparison to the social costs and benefits in the future.
Sustainability
Investment
Social Discount Rate
12.1.1 Establishing Common Units, or "Monetizing"
12.8 CONCLUSION
"Where all benefits and costs can be quantified and expressed in monetary units, benefit-cost analysis provides decision makers with a clear indication of the most efficient alternative, that is, the alternative that generates the largest net benefits to society...

This is useful information for decision makers and the public to receive, even when economic efficiency is not the only or the overriding public policy objective"

- Office of Management and Budget
Tradable Goods
Shadow Pricing
12.1.2 Present Discounted Value (Net Present Value)
12.1.3 Evaluating Uncertainty
12.1.4 Opportunity Cost versus Cash-Flow Accounting
12.1.5 Economic and Noneconomic Values
THE GRIEF FACTOR:
Calculating the Compensation for the Families of the 9/11 Victims
FOR DISCUSSION...
DDT USE AND PUBLIC POLICY
Good public policy "requires evaluating the costs and benefits of the available options."
Which plan would you choose to directly impact traffic congestion within your community:

Plan A: Highway Expansion Plan B: Commuter Rail System
http://www.pe.com/local-news/transportation-headlines/20111114-corona-planners-emphasize-toll-projects-bus-benefits.ece
"Riverside transportation officials want to make sure the nearly $500 million application to widen Highway 91 at Corona with added toll lanes reflects all the project’s benefits, they say. That’s why they’re playing up the new lanes as a means of doubling bus service along the corridor. "
Begley, Dug. "Corona: Planners emphasize toll project's bus benefits." The Press-Enterprise. Enterprise Media, 13 Nov 2011. Web. 11 Jun 2013. <http://www.pe.com/local-news/transportation-headlines/20111114-corona-planners-emphasize-toll-projects-bus-benefits.ece>.
George, Patrick. "This Is What America's High-Speed Rail System Should Look Like." Jalopnik. N.p., 19 Feb 2013. Web. 11 Jun 2013. <http://jalopnik.com/this-is-what-americas-high-speed-rail-system-should-lo-5983045>.
Idea of comparing "
apples
and
oranges
"
To compare 2 or more projects' costs and benefits, analysis requires to convert into a single unit of measure....
$$$
CHALLENGE:
Is it ethical, moral, possible or rational to put a dollar value on: Air Quality? Human Life? Extinction of species?
The GOAL of public policy is to make the BEST use of society's finite resources, which requires some mechanism for evaluating decisions toward the end.
TIME VALUE of MONEY:
the idea that payment today is preferred over payment in the future because of things such as the ability to invest money in the present for greater gains in the future, fears of inflation, and general uncertainty about what the future may bring.
Present Discounted Value Formula:
N/(1 + r)^t
N= the nominal value of the future cost or benefit (aka future value, or FV)
r= the discount rate
t= the number of periods in the future at which the cost or payment will be incurred
Policymakers do not have "obvious" financial benchmarks to be utilized for the discount rate selected. The rate is significant to the cost-benefit analysis and output for the formula.
The formula helps determine whether the investment is worth the benefit.
Public officials must factor in "elements of uncertainty" in the cost-benefit analysis process.
Thus, the cost is a weighted average of two possible outcomes. A 10% risk can make the all the difference between a $3million dollar project or $5million dollar project.
Policy options must require analysis of the risk-averse decisions, including the possibility of unacceptably bad outcomes.
Policy analysts and economists methods for determining the cost for a project are much different than that of an accountant.
Opportunity Cost: reflects the value of whatever has to be given up in order to pursue "x" activity
A "free" ticket vs $75 earned (for 3hrs of work)
Attending graduate program vs two-years of forgone earnings
Time is Money.
Economic cost or benefit: direct pecuniary gain or loss
Noneconomic cost or benefit: intangible gain or loss
Nonuse Value: an intangible value that is attached to a resource for reasons that do not stem from its direct use
NPV= net present value of the project or program
= NPV of total social benefits - NPV of total social costs
If NPV > 0, then society is made better off
NPV is not the only motivating factor to choose a specific option. Certainty and NPV together help policymakers decide which option to decide on.
"The market price is the best measure of the social cost of ...inputs, the resources that can be bought and sold in a competitive market."

The market helps policy makers determine the dollar value for intangible and tangible items.
Dollar value
for
time
saved or lost
Dollar value
for resolving public problems such as dealing with diminished
air quality
Policy makers ought to also encourage
averting behavior
when approving a project to reduce social harm associated with the project
Policy analysts utilize shadow pricing to assign an opportunity cost to "priceless" yet vital resources.
Contingent-valuation Approach (CVA):
Paul Portney, environment economist, attributes three elements of survey method to weigh the value of such resources
ISSUE: Respondents are likely to unintentionally misrepresent their true preferences
Revealed Preferences Approach (RPA):
Human behaviors indirectly assigns value (i.e. real estate data)
ISSUE: Subgroups' behaviors are not a fair representation of the whole population's behavior toward
1. A survey that is geared in depicting a scenario, description, and possible effects of a program
2. A survey that focuses on respondents' willingness to pay and/or participate in the program
3. A demographic survey analysis to discover a relationship (if any) with respondent's personal attributes and their responses to the prior sections of the survey
Hedonic Market Analysis (HMA):
Unlike RPA, HMA utilizes regression analysis to regress the dependent variable on the independent variables to isolate the unique effect of each potential factor.
Contingent Valuation Method
Revealed Preferences Method
Hedonic Market Analysis
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/05/what-an-obscure-microwave-rule-says-about-obamas-climate-plans/
Source: John Morrall, Office of Management and Budget, as cited in "The Pride of Prudence," The Economist, January 22, 2004.
http://www.economist.com/node/2347855
Policymakers can use sensitivity to determine whether the benefits exceed the costs for all reasonable estimates of future prices.
For example, the benefits of solar panels in contrast to the future oil price
Side A:
Developed Nations (U.S)
Side B:
Developing Nations (sub-Saharan Africa)
1940s-1960s
Prior to Ban in US
DDT BAN MOVEMENT
1972
SOURCE:
http://www.dpd.cdc.gov/dpdx/HTML/Frames/M-R/Malaria/body_Malaria_page2.htm
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