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Public Economics > CBA > Flashcards

CBA Flashcards

1
Q

If costs raised by taxation, what should the costs be multiplied by?

A

Social value of government revenue (Sweden does this, UK doesn’t)

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2
Q

Venables (2007)

A
  1. CBA may omit wider economic effects
  2. Should incl. impact of transport improvements on city size and hence productivity of both new/existing city workers
  3. Such productivity effects likely to be significant, substantially increasing gains to urban transport improvements
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3
Q

If intervention sufficiently large to increase long-run economic growth rate, why is this effect likely to dominate others?

A

Because benefits incl. additional consumption in every future period

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4
Q

Policy evaluation - best ways to find true costs/benefits?

A
  1. Best = RCT
  2. Otherwise, staggered roll-out
  3. If staggered roll-out not possible, have to estimate costs/benefits
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5
Q

How are intangible benefits measured in CBA?

A

Shadow prices

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6
Q

Approaches to shadow pricing

A
  1. Survey-based (hypothetical choices)

2. Revealed-preference based (actual choices)

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7
Q

Biases survey-based approaches to shadow pricing subject are subject to

A
  1. Strategic bias – misreporting to influence outcome
  2. Information bias – may have no/wrong information, or subject to behavioural biases (e.g. bad w/probability data)
  3. Framing bias – respondents affected by order/no. alternatives
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8
Q

Example of revealed-preference approach to shadow pricing?

A

Hedonic pricing – run house price regressions to estimate impact on house prices of living near Heathrow airport

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9
Q

Pros and cons of revealed-preference approaches to shadow pricing?

A
  1. Pros:
    (i) Infers preferences from actual choices people make
    (ii) Not subject to strategic bias
  2. Cons:
    (i) Informational and behavioural biases may still be present
    (ii) Excludes non-users and hence existence and/or bequest value (i.e. intrinsic value of something existing, or benefits to future generations)
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10
Q

What is the Kaldor test?

A

can gainers compensate losers after project implemented, so they’re better off?

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11
Q

What is the Hicks test?

A

can losers compensate gainers to forgo the project?

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12
Q

What is the Scitovsky test?

A

project desirable if both Kaldor + Hicks tests satisfied

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13
Q

Methods to estimate VSL:

A
  1. Wage premia for risky jobs
  2. House prices near hazardous waste sites
  3. Price of smoke detectors
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14
Q

What is the VSL?

A

Value of a statistical life

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15
Q
  1. What is a QALY?

2. How much does NICE spend per QALY saved?

A
  1. Quality-adjusted life year

2. NICE generally recommends funding treatments costing below £20k-30k per QALY saved

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16
Q

2 functions for social discount rate:

A

(1) allocate efficiently over time (STP consideration)

2) allocation efficiently between sectors (SOC consideration

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17
Q

What discount rate should be used if considering efficient allocation over time?

A
  1. Rate of social time preference

2. Proceed if return ≥ interest rate society requires to forgo consumption today

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18
Q

What discount rate should be used if considering efficient allocation between sectors?

A
  1. Rate of social opportunity cost

2. Proceed if return ≥ return from best alternative private use of funds

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19
Q

If use social opportunity cost/market rate of return as social discount rate, what factors should you adjust for?

A
  1. Taxes/subsidies
  2. Risk premia (private sector projects riskier, so return higher, i.e. require lower rate of return from public investment)
  3. Social costs + benefits
20
Q

Value of £1000 in 100 years at 3% discount rate?

A

£52

21
Q

Value of £1000 in 100 years at 5% discount rate?

A

£8

22
Q

Value of £1000 in 100 years at 7% discount rate?

A

£1

23
Q

Value of £1000 in 100 years at 3%, 5% and 7% discount rate?

A

3% DR = £52

5% DR = £8

7% DR = £1

24
Q

When should the market price be used to value costs/benefits?

A

When market price = marginal social benefit of output / marginal social cost of input

25
Q

How does Weitzman (1998) justify declining discount rate?

A
  1. Suppose uncertainty about discount rate (e.g. 1/3 chance of 3%, 5% and 7%)
  2. Result: over time, certainty equivalent discount rate tends to lowest ‘possible’ discount rate
  3. Reason – effect of compounding means values attached to higher discount rates become negligible/v. small, so certainty equivalent tends to lowest discount rate
26
Q

Weitzman (1998)

A

UNCERTAINTY MEANS DISCOUNT RATE SHOULD DECLINE OVER TIME

  1. Suppose uncertainty about discount rate (e.g. 1/3 chance of 3%, 5% and 7%)
  2. Result: over time, certainty equivalent discount rate tends to lowest ‘possible’ discount rate
  3. Reason – effect of compounding means values attached to higher discount rates become negligible/v. small, so certainty equivalent tends to lowest discount rate
27
Q

Giglio et al (2015)

A
  1. Analyses v. long-run discount rates implied by comparing freehold and leasehold house valuations
  2. Long-run household discount rate = 2.6% or less (far below market rates of return)
28
Q

What is an integrated assessment model?

A

IAM combines:

  1. Economic model of production/consumption
  2. Geo-physical model of temperature
29
Q

Why is use of revealed preferences to create show prices problematic in climate change CBAs?

A

Myopia/ignorance on future risks

30
Q

Why might ‘standard’ discount rates be problematic when applied to climate change CBAs?

A
  1. V. long-term nature of climate change
  2. Inter-generational equity – ‘pure time preference’ problematic because generations living today may give insufficient weight to future costs/benefits beyond own lifetime
  3. ‘Tyranny of discounting’ – result = to ‘tyrannise’ future generations w/possibly low NPV for catastrophically bad events in distant future
31
Q

What does a 1.5% discount rate imply for the weight given to the well-being of those born 200 years from today?

A

Given less than 10% of the weight of those currently alive

32
Q

Groom et al (2005)

A

even low 1.5% discount rate means well-being of those born 200 years from today given less than 10% of the weight of those currently alive

33
Q

even low 1.5% discount rate means well-being of those born 200 years from today given less than 10% of the weight of those currently alive

A

Groom et al (2005)

34
Q

Groom et al (2005)

even low …..% discount rate means well-being of those born ….. years from today given less than …..% of the weight of those currently alive

A

Groom et al (2005)

even low 1.5% discount rate means well-being of those born 200 years from today given less than 10% of the weight of those currently alive

35
Q

Underlying ethical philosophy of 2006 Stern view

A

Utilitarianism, implying impartiality across generations

36
Q

Stern (2006) review

A
  1. Ethical stance - utilitarian, implying impartiality across generations
  2. Pure-time preference = 0 (can’t give lower weight to utility of future generations just because they live in future)
  3. Discount rate = 1.4% (far below normal Treasury discount rate for public investment projects)
37
Q

Rate of pure time preference used in 2006 Stern view? Why?

A

Zero because can’t give lower weight to utility of future generations just because they live in future (due to impartiality implied by utilitarianism)

38
Q
  1. Disadvantage of Stern’s explicitly ethical/prescriptive approach? (Hindricks and Myles 2013)
  2. Response to this
A
  1. Discount rate used is inconsistent w/individual preferences and observable behaviour
  2. Problem w/using individual preferences is that they may be inconsistent w/generational equity (i.e. preferences of current generation might be too ‘selfish’)
39
Q

Nordhaus (1994)

A
  1. Derives discount rate from observable market behaviour (using Ramsey growth model)
  2. Model based on market values implies discount rate = 3%
  3. Near-zero discounting (0 pure time preference) leads to “completely absurd” conclusions
    (i) Example – if climate damage decreased output by 0.01% in 2200 (continuing for every year thereafter), a one-time payment today equal to 15% of world consumption (c. $7 trillion) to remove this damage would pass CBA test
40
Q

Nordhaus (1994)

  1. Derives discount rate from observable market behaviour (using Ramsey growth model)
  2. Model based on market values implies discount rate = …..%
  3. Near-zero discounting (0 pure time preference) leads to “completely absurd” conclusions
    (i) Example – if climate damage decreased output by …..% in ….. (continuing for every year thereafter), a one-time payment today equal to …..% of world consumption (c. …..) to remove this damage would pass CBA test
A

Nordhaus (1994)

  1. Derives discount rate from observable market behaviour (using Ramsey growth model)
  2. Model based on market values implies discount rate = 3%
  3. Near-zero discounting (0 pure time preference) leads to “completely absurd” conclusions
    (i) Example – if climate damage decreased output by 0.01% in 2200 (continuing for every year thereafter), a one-time payment today equal to 15% of world consumption (c. $7 trillion) to remove this damage would pass CBA test
41
Q

Stern (2006) review

  1. Ethical stance - …..
  2. Pure-time preference = ….. (can’t give lower weight to utility of future generations just because they live in future)
  3. Discount rate = …..% (far below normal Treasury discount rate for public investment projects)
A

Stern (2006) review

  1. Ethical stance - utilitarian, implying impartiality across generations
  2. Pure-time preference = 0 (can’t give lower weight to utility of future generations just because they live in future)
  3. Discount rate = 1.4% (far below normal Treasury discount rate for public investment projects)
42
Q

Problem with Nordhaus’ aim to avoid ethical assumptions/value judgements when deriving discount rate consistent w/observable behaviour?

A
  1. Value judgements impossible to avoid

2. Nordhaus’ ‘value judgement’ is that observable behaviour should constitute ethical standard

43
Q

How does Weitzman criticise the climate change debate?

A
  1. Stern/Nordhaus debate implies that extent to which we care about climate change depends crucially on discount rate used
  2. But v. low probability, v. high impact (possibly catastrophic) dominate analysis, whichever discount rate we use
44
Q
  1. CBA may omit wider economic effects
  2. Should incl. impact of transport improvements on city size and hence productivity of both new/existing city workers
  3. Such productivity effects likely to be significant, substantially increasing gains to urban transport improvements
A

Venables (2007)

45
Q

Example of when CBA might omit wider economic effects

A

Venables (2007)

  1. Impact of transport improvements on city size and hence productivity of both new/existing city workers
  2. Such productivity effects likely to be significant, substantially increasing gains to urban transport improvements
46
Q
  1. Analyses v. long-run discount rates implied by comparing freehold and leasehold house valuations
  2. Long-run household discount rate = 2.6% or less (far below market rates of return)
A

Giglio et al (2015)

Public Economics (9 decks)

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