Cost Benefit Anaylsis

Question 1

what is cost benefit anaylsis?

Answer 1

it is a decision making tool used by governments as a means of seeing whether the benefits of a policy are greater or lesser than its costs from societies perspectives. it adopts welfare economics criteria vs commerical criteria by attempting to monetise all the costs and benefits if a proposed action.

Question 2

what are the steps of cost benefit anaylsis?

Answer 2

1- define a project/policy such as relevent population or length
2- list all the costs and benefits one can think of in relation to a proposed action
3- for costs and benefits ordinarily measured in monetary units (obtain reliable estimates)
4- for costs and benefits not ordinarily measured in monetary units, use non market valuation techiniques to obtain estimates. if actual non market values cannot be estimated due to budgetary or other constraints consider transferred values or expert opinions
5- add up all the discounted costs and benefits, preferrably under a range of plausible assumptions or scenarios
6- compare total discounted costs to total discounted benefits to obtain a recommendation

Question 3

what is the problem of postive vs maximisation in CBA?

Answer 3

positive net benefits is not enough to proceed with the project. economics aims to maximise the benefits so because there may be another proposal which could generate larger benefits then that will be the superior option. we need to consider a wide range of options before recommending an action

Question 4

what is the problem of distributional consequences in CBA?

Answer 4

a bottom line estimate of the net benefits across society does not tell us anything about the distribution of the costs or benefits across the society. a proposal that might yield net positive benefits could be rejected on equity grounds.

Question 5

what is an investment project?

Answer 5

it is something that involves a current commitment with consequences stretching over future time

Question 6

why are costs and benefits in the future not equivelent to the costs and benefits of the present?

Answer 6

1) inflation - money is worth less in the future
2) investment - money available now can usually be invested to get a real positive return
3) uncertainty - if we get benefit now we wont have to worry about the future
4) impatience - natural human tendency to focus on the present more than the past
5) utility - if real gdp continues to grow then the people in the future will be richer. as a result they will be less impacted by the same amount of damages and benefits

Question 7

what is discounting?

Answer 7

it is a technique to bring back in time values that will occur in the future. it attaches a discounted weight to the costs or benefits that occur in the future

Question 8

what is the discount rate?

Answer 8

annual rate by which future values are reduced relative to current values.

Question 9

what is the growth type of the discount factor?

Answer 9

it is exponential

Question 10

what is the effect of choosing a high discount rate in CBA?

Answer 10

A high discount rate will highly favour the present over the future.

Question 11

what is the effect of choosing a low discount rate in CBA?

Answer 11

A low discount rate will give more weight to future costs or benefits.

Question 12

what type of discount rate supports enviromental applications?

Answer 12

to support enviromental applications we need a low discount rate

Question 13

what are the two main approaches for setting the discount rate?

Answer 13

1) Set discount rate equal to the rate of return on low-risk investments(government bonds).
2) Set discount rate equal to social discount rate/social rate of time preference (SRTP)

Question 14

what is the motivation with setting the discount rate equal to the rate of return on low risk investments such as government bonds?

Answer 14

funds used for a beneficial public project could otherwise be invested in another asset with interest to provide society with greater resources in the future

Question 15

what is the issue with using the discount rate equal to the rate of the return on low risk investments such as government bonds?

Answer 15

the rate of return on government bonds vary over time so should we really base the valuation of long term effects of enviromental projects upon an interest rate that is subject to finacial market conditions

Question 16

what is the motivation for setting the discount rate equal to the social discount rate/ social rate of time preference?

Answer 16

one reason is the impatience- the pure rate of time preference and another is the diminishing marginal utility of consumption

Question 17

what is the social rate of time preference>

Answer 17

a measure of society’s willingness to postpone private consumption no win order to consume later.

Question 18

what is the pure rate of time preference?

Answer 18

society’s “impatience” and is the rate of decrease in the utility of incremental consumption purely because that utility occurs in the future

Question 19

what is the elasticity of the marginal utility with respect to consumption?

Answer 19

how utilility changes with consumption

Question 20

what formula tells us how better of we are as a society?

Answer 20

multiplying the growth rate of consumption by the rate at which the extra satisfaction from increased consumption declines as consumption increases

Question 21

what is the formula for the net present value?

Answer 21

the discounted benefits - the discounted costs

Question 22

if the net present value is postive then what should happen?

Answer 22

then project should be recommended

Question 23

if the net present value is negative then what should happen?

Answer 23

the project should be rejected

Question 24

what are the three main issues with the cost benefit anyalsis?

Answer 24

1) value human life
2) risk and uncertainty
3) benefit transfer

Question 25

what are two ways the value of statistical life can be estimated?

Answer 25

the first is a wage risk anaylsis. the second is using contingent valuation surveys

Question 26

what is the value of statistica;l life?

Answer 26

it indicates how much society is willing to pay ot prevent one death from environmental risk without specific reference to whose death will be avoided. it represents an individuals willingness to pay for small changes in mortality risk. rate at which people are prepared to trade off income for a reduction in their risk of dying

Question 27

how can you estimate value of statistical life using a wage risk anaylsis?

Answer 27

statistical analysis used to determine the wage premium that needs to be paid to attract workers to particularly risky jobs, while controlling for other factors.
method used to estimate the value of a statistical life based on the required compensation needed to induce people to high-risk jobs.
compare wage differentials between risky and non-risky jobs.
uses data from labour markets to infer how much workers have to be compensated to accept riskier jobs—or the sacrifice in income they would agree to in exchange for an improvement in their workplace safety

Question 28

what are the critiques of using the wage risk anaylis to estimate the value of statistical life?

Answer 28

people undertaking relatively risky jobs are not representative of the broader population-( the wage premium required to attract the average person is likely to be higher)
use of a single VSL for different policy applications ( evaluate the risk of cancer from contaminent the same way as nuclear accident via wage differentials)

Question 29

how can the value of statistical life be estimated using contingent valuation surveys?

Answer 29

In contingent valuation surveys, respondents are asked to report their willingness to pay (WTP) for aspecified—and hypothetical—risk reduction.

Question 30

what are the advantages of using contingent tables to estimate the value of statistical life?

Answer 30

• It can assess risk reductions in many contexts, and are thus not limited to workplace risks.
• It does not assume that people know the exact magnitude of the risks they face
• It surveys directly the beneficiaries of any proposed risk-reduction measure

Question 31

what are the disadvantages of using contingent tables to estimate the value of human life?

Answer 31

Respondents are not used to dealing with probabilities, especially when risks are very small
The cognitive burden imposed upon them in the survey—or the failure to communicate risks to them in a meaningful way—may result in undesirable effects ie random answers or failure to recognise risk reductions

Question 32

how does the value of statistical life differ between countries?

Answer 32

developing countries tend to have a significantly lower value of statistical life

Question 33

what are the critique of VSL on ethical grounds?

Answer 33

there can be no numerical value of human lives, human live is inherently priceless

Question 34

what is the risk and uncertainty issue with Cost benefit anaylsis?

Answer 34

the future outcome of a specific project is not known with certainty.

Question 35

what is risk?

Answer 35

it describes a situation in which all the potential outcomes of an action and their probabilty are known or can be accurately measured. the randomness of an outcome can be quantified

Question 36

what is uncertainty?

Answer 36

it describes a situation in which some of the outcomes of an action are unknown or cannot be assigned probabilities therefore the randomness cannot be accurately quantified

Question 37

what can be incorporated in CBA, risk or uncertainty?

Answer 37

risk

Question 38

how can you work out the expected cost of a risky event?

Answer 38

multiply the cost of the event occuring with its expected probability and then adjust for future using discount rates

Question 39

what is risk aversion?

Answer 39

the tendency to prefer certainty instead of risky outcomes, particularily when significant negative consequences may result from an action

Question 40

what is a response in CBA to risk aversion?

Answer 40

you can add more weight to any significant negative outcomes such as increasing the probability of event
you can also apply a precautionary principle - policies should be in place to avoid low probability but catastrophic events

Question 41

what is benefit transfer?

Answer 41

the process of applyinh quantative estimates of ecosystem services values from an existing study in another context

Question 42

what is the motivation for benefit transfer?

Answer 42

conducting a Cost benefit anayslysis can be time consuming and expensive and avaliable resources to spend are limitied

Question 43

how can the accuracy of benefit transfer be assessed?

Answer 43

correct benefit value obtained by conducting an original study can be compared to the transferred value of other studies

Question 44

what are the 4 main ways in order to reduce the potential errors from benefit transfer?

Answer 44

1) always consider the quality of the original study
2) always consider up to date studies
3) consider multiple studies
4) develop clear guidelines for conduction those transfers and subject their analysis to peer review

Question 45

what are the alternatives to cost benefit analysis?

Answer 45

there is cost effectiveness anaylsis and also postional anaylsis

Question 46

what is cost effectiveness anaylsis?

Answer 46

it is an analysis that seeks to determine the least cost way of achieving a given policy goal

Question 47

what is the advantage of using cost effectiveness analysis compared to CBA

Answer 47

it tells us how to choose the most economically efficient policies to achieve a desired result

Question 48

what is postional anayslis?

Answer 48

a policy anaylsis tool that combines economic valuation of a particular policy with other considerations such as equity or individual rights. it does not aim to reduce every impact to monetary terms