Session 8

Question 1

What is difficult when doing a cost-benefit analysis of environmental projects?

Answer 1

• implies social appraisal of investment projects
• criteria from welfare economics rather than commercial criteria
  
  • without externalities they would be the same
  • with externalities cost side can be understated
• CBA should include analysis of government policies
• attach monetary value to non market valued objects

Question 2

How can private CBA be done through the net present value?

Answer 2

• through NPV
• PV_receipts - PV_expenditures
• if NPV > 0, project successfull

Question 3

What is the internal rate of return and how can it be calculated?

Answer 3

• interest rate at which NPV is zero
• solve 0 = NPV with variable i
• if real i is smaller than IRR -> project successfull

Question 4

Looking at the NPV calculations, how can we cope with uncertain outcomes?

Answer 4

• assign probabilities to different outcomes
• calculate expected NPV E[NPV] -> if > 0 positive

Question 5

What is utility based appraisal?

Answer 5

• in social CBA, input cannot be measured using costs and market valuations
• need to take account of externalities
• evaluate change in utility of all affected individuals
• aggregate utilities across individuals within each time period
• compute overall welfare delta W
• problems
  
  • need welfare function W
  • utilities generally not oberservable, difficult to measure

-> trace all consequences of projects for consumption individuals

Question 6

What is consumption based appraisal?

Answer 6

• similar to utility based, but exchange utility by net consumption and assume this is equal to net benefit
• existence of surplus (NPV > 0) implies that compensation is possible
  
  • winners of project compensate those wo are better off
  • compensation payments could mitigate distributional effects

Question 7

How does the Environmental CBA work?

Answer 7

• ECBA extracts environmental effects in both B and C
• EC are discounted new environmental effects

Question 8

How does Multi criteria analysis work?

Answer 8

• is alternative to ECBA
• Look at different options and evaluate them in different criteria
• transform to relative values by giving best option of each criterion 1 and competing options relative values
• before aggregation add weights to criteria

Question 9

What ist the travel cost method and what is it good for?

Answer 9

• good for measuring external costs
• dates back to hotelling
• attempt to evaluate non-market goods empirically
• approach: back out willingness to pay using cost data (other than price)
• example: evaluate park by travel costs

Question 10

How to calculate value based on travel cost method?

Answer 10

• park example
• estimate v_i = alpha + beta * T_i + epsylon_i where v is visits from zone i, T is travel costs from zone i (also visits per 1000 people)
• assume that prices to access park have same effect on visits as travel cost
• use estimated coefficients alpha and beta to predict visits as v_i = alpha + beta * (T_i + P) + epyslon
• vary p from zero until visits are zero
• calculate demand curve from accumulated V values (for each zone v * number of inhabitants)
• calculate consumer surplus = area under graph