Chapter 6: Referent Group CBA

Question 1

Referent Group

Answer 1

The group whose net benefits are relevant to the decision-maker who commissioned the CBA

Question 2

What will the referent group normally consist of?

Answer 2

All residents of a region, state or country;

All members of s coal group (eg. pensioners, native peoples)

Question 3

If only referent group benefits are relevant, why bother to calculate the efficiency net benefit?

Answer 3

• Efficiency: benefit of project as a whole, using opportunity cost as efficiency prices
• Sum of referent group and non-referent group net benefits = efficiency net benefits
• This relationship provides a consistency check for the CBA as a whole

Question 4

Why do we need CBA to identify referent group net benefits?

Answer 4

• A market evaluation will only capture benefits and costs which are fully measured by market prices
• It fails to capture various public interest aspects (e.g. employment benefits; indirect tax revenue changes; pollution costs, etc)

Question 5

Four-Way Classification of Net Benefits

Answer 5

Net Benefits accruing to:
RG:
- captured by market prices: A
- not captured by market prices: C
NON-RG:
- captured by market prices: B
- not captured by market prices: D

Question 6

Four-Way classification of net benefits: market analysis

Answer 6

A+B

Question 7

Four-way classification of net benefits: referent-group analysis

Answer 7

A+C

Question 8

Four-way classification of net benefits: efficiency analysis

Answer 8

A+B+C+D

Question 9

Four-way classification of net benefits: What is C+D is empty?

Answer 9

If C+D is empty, the Market Analysis coincides with the Efficiency Analysis

Question 10

Four-way classification of net benefits: What if A+C is empty?

Answer 10

If A+C is empty, the project has no relevance for the Referent Group

Question 11

Four-way classification of net benefits: What if B+D is empty?

Answer 11

If B+D is empty, the non-referent group is not affected by the project

Question 12

Four-way classification of net benefits: What is A+B is empty?

Answer 12

If A+B is empty, the project does not involve any inputs or outputs traded in the market (really only a hypothetical case)

Question 13

How do we identify the various categories of disaggregated referent group net benefits?

Answer 13

1. Follow the financial flows
   - division of project profits between referent and non-referent group members
   - identify direct and indirect tax flows e.g. business income tax, sales tax, tariffs, etc.
2. Learn from the shadow-prices
   - where there is a shadow-price the Market Analysis has failed to pick up an efficiency net benefit that must be assigned to either the referent or non-referent group

Question 14

Using shadow-prices to identify RG benefits and costs:

Market price greater than shadow price?

Answer 14

• Input: benefit to the owner of the input (e.g. unemployed labour)
• Output: cost to public or Government (e.g. loss of tariff revenue, cost of pollution generated by use)

Question 15

Using shadow-prices to identify RG benefits and costs: Market price less than shadow price?

Answer 15

• Input: cost to alternative user of the input (e.g. monopoly or monopsony employer)
• Output: benefit to general public (e.g. vaccination)

Question 16

Recap: How do we approach CBA?

Answer 16

1. Market Analysis (A+B)
2. Private Analysis (subset of A+B that affects private equity holders)
3. Efficiency Analysis (A+B+C+D)
4. Calculate Aggregate Referent-Group Net Benefits (A+C) = (A+B+C+D) - (B+D)
5. Calculate disaggregated Referent-Group Net Benefits