CBA Flashcards
Examples of the first time CBA was used in the UK
1960s-70s CBA used in transportation (M1 Motorway, London Victoria Underground, Channel Tunnel, Third London airport)
What did the 1990 Pearce report recommend
recommended that environmental impacts (costs and benefits) should be included and considered in formal policy and project appraisal where possible
What were the outcomes of the Pearce Report
Report influenced several policies in the UK since 1990s, e.g. landfill tax, national air quality standards, agri-environmental policies
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What is CBA
a formal instrument to support public decision making ie when a resources is scare, how can we make the best choice?
What theory is CBA based in
welfare theory
What do CBA’s include
any impact on utility whether or not it is reflected in market prices
What does welfare economics evaluate
Welfare economics evaluates alternative resource allocations in terms of their effects on utility
What is scarcity rent
It is the cost of “using up” a finite resource because benefits of the extracted resource are unavailable to future generations
When is efficiency achieved in terms of scarcity rent?
Efficiency is achieved when the resource price–the benefit society is willing to pay for the resource today–is equal to the sum of marginal extraction cost and scarcity rent.
What element is essential for CBA to work
alternatives
Give examples of project alternatives
do nothing
do a bit
do something else
How do private investors view CBA differently to public investors ?
For the private investor, the CBA is the business plan
For the public investor, costs and benefits are social welfare
What is the aim for economic analysis?
Assess the effect of a project on the welfare of the affected population (local, regional, national, international)
it has a social perspective
What are the differences between financial and economic analysis
F.A. is focused on variables surrounding price, market prices and hasa private perspective
E.A is focused on variables surrounding value, shadow prices and had a public perspective
What is the equation for future value?
Present value x (1+ r)^t
What is the equation for present value?
FV / (1 + r)^t
What is the net present value
value, or net benefit of a project over time. It is a way to assess, for example, a long term investment in retrofitting the lighting in ENV
Why is the discount factor a thing
People tend to value money they have in the present than money they could receive in the future
strengths of CBA
Appraisal technique for economic efficiency in resource alloation
Identify all costs and benefits in a formalised way
Incorporates social values and prefenences in decision making
Integrates financial and environmental effects
Weaknesses of CBA
Ethical framework: policy is welfare improving if we could compensate losers
Monetarily valuing nature, culture
Discounting nature
Does not adequately address cumulative & indirect effects, complexity, uncertainity
Time and resource intensive
What is the green books discounting rate
3.5%
What does a lower discount factor favour
favours investments in future generation
How do we value environmental c and b
Revealed preference methods
Stated preference methods
Replacement cost
Avoided cost, etc
How should cba be appraised in relation to inflation
Costs and benefits should be appraised with the effects of general inflation removed
