Chapter 1: Introduction and Overview Flashcards Preview

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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

1. Uncompetitive market structures - e.g. monopolies, monopsonies, and oligopolies - market produces too little output at too high a price
2. Government interventions - taxes, subsidies, quotas, price controls - create market distortions - drive a wedge between suppliers' and buyers' price in the market
3. 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)


Project Appraisal and evaluation as a continuous process

Project concept -> Appraisal -> Implementation -> Evaluation


How do we approach CBA?

1. Do the market analysis first (A+B) because of availability of data
2. Do the private analysis, i.e. identify the subset of A+B that affects equity-holders, lenders and government
3. Do the efficiency analysis (A+B+C+D) using shadow-prices and non-market valuations where appropriate
4. Calculate aggregate Referent Group net benefits (A+B+C+D)-(B+D) = (A+C)
5. Calculate disaggregated Referent Group net benefits and do a check