ECON 370 Study Guide - Winter 2019, Comprehensive Final Exam Notes - Root Mean Square, Opportunity Cost, Net Present Value

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30 Mar 2019
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What is Cost-Benefit Analysis?
Cost-benefit analysis (CBA) is a framework that is sometimes used to help guide public-sector (ie,
government) decision making
CBA can help decision makers
determine if a particular project or policy is worthwhile
choose between several mutually exclusive projects or policies
In this course, we will use the term project to refer to broad range of government interventions
including policies, programs, physical investments and regulations; eg,
building a hydroelectric dam
establishing a national day-care program
increasing the minimum wage
introducing a regulation limiting mercury emissions from coal-fired power plants
At its most basic level, CBA simply involves
identifying and summing a projects positive impacts (ie, its benefits)
identifying and summing a projects negative impacts (ie, its costs)
comparing the project’s total benefits to its total costs
CBA and financial analysis are different
financial analysis considers only financial costs and benefits (ie, outlays and receipts)
CBA considers social costs and benefits, which are often quite different from financial costs
and benefits
Cost-benefit analysis is often called social cost-benefit analysis to emphasize the broad societal
perspective used in CBA to identify and quantify a projects costs and benefits
© Clive Chapple. Not to be copied, used, revised, distributed, or posted without explicit permission of copyright owner.
Lecture 1: page 1
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CBA may be conducted at different points in a projects life cycle
1. ex ante CBA: conducted before project starts
2. in media res CBA: conducted while project is ongoing
3. ex post CBA: conducted after project has finished
Ex ante CBAs are far more common than either in media res or ex post CBAs
We will focus on ex ante CBA in this course, but the logic and methods are basically the same for in
media res and ex post CBA
Main Steps of CBA
1. Explain purpose of the CBA
2. Specify set of alternative projects
3. Decide who has standing
4. Identify impacts and select metrics
5. Predict impacts quantitatively over life of project
6. Monetize impacts
7. Discount costs and benefits
8. Compute net present value of each alternative
9. Perform sensitivity analysis
10. Make recommendation
© Clive Chapple. Not to be copied, used, revised, distributed, or posted without explicit permission of copyright owner.
Lecture 1: page 2
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