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05 - Cost Benefit Analysis, and Empirical Approaches (320B 2013).pdf

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Political Science
POLI 101
Paul Quirk

Lecture 5: Economic Analysis: Cost-Benefit Analysis, and Other Applications Political Science 320B 2013 Prof. Quirk PRELIMINARY Finish other lecture Lectures up to now will be posted this week. Cost-Benefit Analysis (CBA) Intro Existence of market failure shows that the market outcome (no govt intervention) is not optimal; there is some potential benefit of govt action. But govt action has costs. Taxes, or burdens of regulation. The question: are the benefits worth the costs? CBA—a set of techniques for putting monetary values on the benefits and costs of public policies— to decide which ones are warranted. Thus you can compare: dollars (benefits) to dollars (costs)—which are greater? Measuring costs Often fairly easy. Major elements: actual spending by the government; financial costs to citizens or businesses of complying with regulations. Some costs are harder to measure, much like some of the benefits (e.g, a welfare program, supplementing income of low-income families, may discourage employment). Measuring benefits The easiest case: government produces some benefit that is already bought and sold in a market, with indentifiable prices. E.g. government builds a dam, which will produce electric power. Benefits of electric power is simply the price that people are already paying for the amount of power. OR govt has training program for low-income people. Benefits are equal to the increase in their wages (from before and after comparison. What if there is no market for the benefit? E.g., cleaner air; more equality; safer streets: there is no place to buy these things! Two major approaches, if no direct market valuation Use a survey to measure “willingness to pay.” ask some people how much they would pay. Then multiply by the number of individuals who would be in the same situation. This produces exaggerated values—people want everything; they ignore budget constraints. But you can discount the amounts. Thus this approach is of some value. Find market prices that reflect the benefit indirectly. Pollution. A real example: What is it worth to reduce pollution by 50%. Use evidence from real estate prices in places with high and low pollution. (Use controls for other factors). What do you think? (Any other suggestions?) A major, controversial example: how much is it worth to save one life? Relevant for policies on safety or health, designed to save lives. E.g. how much to spend on organ transplants? Is this a good idea? Why? Why not? DISCUSS. Why: No one should like discussing this. But if policies don’t set consistent values, then they waste lives!!!! Suppose $10 million for a highway improvement saves 2 lives (before highway is rebuilt) in highway safety; but the same amount would saves 100 lives in immunizations, not being performed. Govt should move the money to immunizations; save 98 more lives. Govt should use a fairly consistent valuation. Viscusi study (forthcoming article)—Do quickly. Basics of his study: law requires companies or EPA to clean up hazardous wastes (e.g. a dump, not properly sealed; sometimes owner out of business). Study combines three kinds of estimates: 1) at the site—how many people would be exposed to a certain substance, at what levels, if no cleanup? 2) Epidemiological or animal studies—how many cancer deaths from a given amount of exposure (if 10,000 people exposed, how many die?) 3) Cost of average cleanup. Combine all this: you get how much money is spent for each life saved. His result: cleanup program costs $100 million per life saved!! Very bad payoff, compared with many other expenditures. (E.g. better to just keep people away from the hazardous area.) How to set a value on life? (Note. Viscusi just estimates cost per life saved in a given program. Doesn’t address, what value to use in general.) One old approach: the value of a life is the persons’ expected lifetime earnings. This measures economic contribution. It doesn’t make sense—that’s not why we value a life!. Also: obnoxious results: disabled person—no earnings—does that mean their life is worth less? More recent approach to setting value for life: price paid for dangerous jobs. How much extra do people demand in wages if job involves risk of loss of life? Two jobs, equally skilled and difficult: one job has 1/250 greater chance of premature death during entire career. Suppose the dangerous job pays $270 per year more, apparently because of this risk. Then worker values his life at 250 X $270 X 30 yrs = $2,025,000. Indicates: govt should value a life at about $2 million. WHAT DO YOU THINK? Is this right??? What to expect from this exercise. Not to get the “right” value. But get a reasonable number. Otherwise how can you say, $30,000 or $500 million? And it’s beneficial to set a value for any given government and use somewhat consistently. Other forms of policy research Intro: Most policy research is not based on economic theory. It just seeks to find out the effects of policies on conditions in society. Or sometimes tries to find the causes of social problems—so that policy can try to remove the causes. The effects of capital punishment: an example. state policies provide almost an experiment on the effects of capital punishment (the death penalty) in deterring crime. In the late 1960s, the Supreme Court ruled that all existing state and federal laws authorizing capital punishment were unconstitutionally vague—i.e. they didn’t say clearly who should be executed—and therefore subject to racial and other biases in implementation. In 1976, stated criteria for permissible statutes. Over a period of two decades, many of the states passed new laws and reinstituted capital punishment. Of those, some used it fairly frequently, especially Texas; some did not. The result was a lot of change over a fairly short period of time, and a lot of differences between states. Most states had significant periods without capital punishment; then many adopted, at different times; and with different numbers of executions. Perfect for research. (
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