Chapter 6: Referent Group CBA Flashcards Preview

ECON3220 Final Exam > Chapter 6: Referent Group CBA > Flashcards

Flashcards in Chapter 6: Referent Group CBA Deck (16):
1

Referent Group

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

2

What will the referent group normally consist of?

All residents of a region, state or country;
All members of s coal group (eg. pensioners, native peoples)

3

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

- 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

4

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

- 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)

5

Four-Way Classification of Net Benefits

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

6

Four-Way classification of net benefits: market analysis

A+B

7

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

A+C

8

Four-way classification of net benefits: efficiency analysis

A+B+C+D

9

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

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

10

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

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

11

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

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

12

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

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

13

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

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

14

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

- 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)

15

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

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

16

Recap: How do we approach CBA?

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