Chapter 1: Introduction and Overview Flashcards
What is CBA?
A process of identifying, measuring and comparing the social benefits and costs of an investment project, program or policy intervention, from a public interest perspective
What do we mean by public interest?
Assess implications that a private/public sector project has for Government revenue/expenditure, employment, the economy, and the environment
Two key principles of CBA
Transparency and accountability (in making underlying judgements and assumptions explicit). Assumed values for all quantities and dollar values of inputs and outputs should be:
- clearly visible to all reviewers of the CBA
- justified/explained in the accompanying report
Why do we need CBA?
Market failure - purely market-based decisions do not always deliver an outcome that is socially desirable - in the best interests of the public at large
- The market price does not provide a good indicator of social value; and
- The market fails to deliver an efficient outcome from given resources
Three main reasons for market failure
- Uncompetitive market structures - e.g. monopolies, monopsonies, and oligopolies - market produces too little output at too high a price
- Government interventions - taxes, subsidies, quotas, price controls - create market distortions - drive a wedge between suppliers’ and buyers’ price in the market
- The presence of external costs and benefits (externalities) - often there is no market price leading to over/under use: e.g. clean air
Pareto improvement
Makes at least one individual better off without making any other individual worse off
Potential pareto improvement
CBA decision criterion - benefits to gainers are greater than losses to the losers - allowing for possible compensation of losers
Opportunity cost
The cost of using resources for one potential project in terms of the benefits we forgo by not using the same resources for production in the next best alternative project
The systematic framework
- Variables section: contains all relevant data
- Market analysis: values project at market prices
- Private analysis: calculates value to the private proponent
- Efficiency analysis: calculates value to the economy
- Referent group analysis: calculates public interest value of the project
Who benefits from the systematic framework?
The analyst:
- a simple framework for applying a standard methodology
- a check on the internal consistency of the analysis
The decision-maker:
- uniformity of approach to analysis
- check on internal consistency
- transparency of project data and assumptions
Efficiency prices
Prices that measure the marginal value of project output or the marginal cost of product inputs from the viewpoint of the economy as a whole
Inputs/outputs the market fails to cost or value correctly
Could include: otherwise unemployed labour; pollution; foreign exchange, etc.
Why do shadow-prices differ from market prices?
Private markets may be uncompetitive (e.g. monopoly power); distorted (e.g. taxes and regulations); or absent (e.g. market for clean air)
What is the Referent Group?
- The group of individuals from whose viewpoint the project is to be appraised - i.e. those whose welfare matters
- Normally includes all residents of the State/region, including the government
- Normally excludes foreign entities and residents of other states
How does it all fit together?
A: Referent Group (market prices) B: Non-Referent Group (market prices) C: Referent Group (non-market prices) A+B=Market (market prices) A+B+C=Efficiency (market and non-market prices)
