Lecture 7 Flashcards
Define WTP?
Willingness to pay = what people are willing to pay for a benefit
Define WTA?
Willingness to accept = what people are willing to accept as compensation for a cost
WTP = ? (Demand diagram)
Consumer surplus + revenue
Demand curve = marginal willingness to pay
How to tell if a society will benefit from X?
If ΣWTP>ΣWTA then net benefit
If ΣWTP
What does a CBA do?
A cost benefit analysis finds if ΣWTP-ΣWTA>0
Define present value?
The value of some future payment today
How to calculate the present value of X in y years time?
X / (1+interest)^y
Where interest = interest rate/100
Net present value = ? (/cost benefit rule)
Σ(Bt-Ct) / (1+r)^t
Why do we use discounting?
Because money over time has an opportunity cost
TPVB - TPVC =
NPV
3 reasons environmentalists criticise discounting?
1) environmental costs that occur far in the future are valued less (tf high initial value project but bad for env. in LT will go ahead)
2) projects with long term high environmental benefits may be rejected since these benefits will have less value
3) also means resources are worth more if they are used now tf used unsustainably
8 steps of a cost benefit analysis?
1) definition of project
2) identification of project impacts
3) determining relevant impacts
4) quantifying of impacts
5) monetary valuation of impacts
6) discounting
7) applying NPV test
8) sensitivity analysis
DID Quentin Make Discounting A Struggle
What is meant by definition of project?
What it is, who it will affect
What is meant by identification of project impacts?
Materials used, impacts on employment, traffic, environment
What is meant by determining relevant impacts?
Do they affect anyone/change welfare society
