Deck 01 Flashcards
Define Cost-Benefit Analysis
- An analysis in wh/ both the cost and benefits are measured in dollars.
- useful in determining which program or intervention has the greatest benefit.
- It is a useful method for comparing multiple programs with varying outcomes.
Describe Cost-Benefit
It values indirect benefits using the human capital (HC) and intangible befits using the WTP approach
When do you use Cost-Benefit Analysis?
- Welfare economics
- Used to help make decisions regarding public policy by incorporating individual preferences and values to improve social welfare while balancing the effective use of resources.
- Setting environmental policy.
- Public goods such as wildlife, air quality, public parks, and health care.
HC estimates?
Wage and productivity losses because of illness and disability or death
What are the 2 components of calculating HC?
i) Wage rate
ii) Missed time (days or years) because of illness
Explain WTP
- Method can value both the indirect and intangible aspects of a disease or condition.
- Method determines how much people are willing to pay to reduce the chances of an adverse health outcome.
- Method is grounded in welfare economic theory, and it incorporates patient preferences and intangible benefits such as quality of life differences.
Advantages of WTP
- A method to place a dollar value on intangible benefits.
2. It is also grounded in the welfare economic theory, which embodies patient preferences and choice.
Disadvantages of WTP
- It is difficult for people to place a dollar value on a health benefit or an increase in health-related quality of life or satisfaction.
What are the 3 methods used to calculate CBA?
- Net benefit (or Net Cost) calculations
- Benefit-to-Costs ratios.
- Internal Rate of Return.
Net benefit =
Total benefits - total cost
Net cost =
Total cost - total benefits
In Net benefit or Net Cost, interventions would be considered to be cost-beneficial if
i) Net Benefit > 0 or ii) Net Cost < 0
benefit-to-cost ratio
(Sum of the total benefits) / (Total cost)
Cost-to-benefit ratio
(Total cost) / (Sum of the total benefits)
What is IRR?
- It is the rate of return that equates to the present value (PV)
- The goal is to find the rate of return that would make the costs and benefits equal.
present value (pv) of future benefits and costs
future benefits and costs must be included, future values are worth less than values today, focus on present value of expected net benefits
present value
benefits that accrue later are discounted to today’s value- worth more in the future
Types of discount rates for government projects
social rate of discount
social rate of discount
valuation society would place consumption that is sacrificed, accounts for concern about future generations, 2-3% real return
Value of a Statistical Life (VSL)
how much we are willing to spend to save a life
valuing public benefits and costs
- compared to what?
- what counts?
- who has standing?
- what can be counted?
- how much?
- how long?
basic steps of CBA
- specify options or alternatives
- decide what benefits and costs count
- decide who to consider
- determine what you can measure
- Monetize all impacts
- discount benefits and cost to obtain present values
- Find net present value of each alternative
- Sensitivity analysis
- make a recommendation
What is 1 step of CBA
Specify the set of alternative projects
What is step 2 of CBA
- Decide whose benefits and costs count (standing)
2. E.g. Fyn, Denmark or World
What is step 3 of CBA
- Identify the impact categories, catalogue them, and select measurement indicators
- E.g. Accidents avoided, saving time
What is step 4 of CBA
a. Predict the impacts quantitatively over the life of the project
b. E.g. traffic, time saved, lives saved over the project life
What is step 5 of CBA
a. Predict the impacts quantitatively over the life of the project.
b. E.g. traffic, time saved, lives saved over the project life
What is step 6 of CBA
- Discount benefits and costs to obtain present value.
2. Projects has impact that occur over years. We need to aggregate the benefits and costs that arise
What is step 7 of CBA
a. Compute the net present value of each alternative
b. NPV=PV(benefits)-PV(costs). When there are several alternative projects, choose the one with the highest NPV.
What is step 8 of CBA
a. Perform sensitivity analysis
b. There is an uncertainty of the predicted impacts and monetization
What is step 9 of CBA
a. Make a recommendation
b. Choose the project with highest NPV but be aware of the sensitivity analysis as the project with highest NPV is not always the best decision.
What does ex-ante mean?
we look at future events based on possible predictions
What does ex-post mean?
we look at results and events after they have occurred.
What does midway mean?
We reevaluate if the parts or abandon the project
Denote the utility of an individual
u_i=u_i (x_i, P)
x_i, denotes individual I’s consumption (or income), P=1 means project is adopted
Denote the utility of an individual’s willingness to pay based pm the quantity
u_i (x_i−∆_i,1)=u_i (x_i,0)
x_i=individual consumption,
