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Canada (161,960)
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EC238 (54)
Karen Huff (33)
Chapter 6

Chapter 6 EC238.docx

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Karen Huff

EC238 Chapter 6 – Framework of Analysis Week 5 Benefit-Cost Analysis -Benefit-cost analysis is a tool for helping to make public decisions – what policies and programs to introduce – done from the standpoint of society in general rather than from that of a single profit- making firm -It incorporates social valuation of all inputs and outputs related to the project whether or not they are transacted in private markets -Has two intertwined lines: among its practitioners economists inside and outside public agencies who have developed the techniques, tried to produce better data and extended the scope of the analysis; the politicians and administrators who have set the rules and procedures governing the use of benefit-cost analysis for public decision making -In Canada, benefit-cost analysis has not been officially legislated for use by government agencies at the federal or provincial level The Basic Framework -Involves measuring, adding up, and comparing all the benefits and all the costs of a particular public project or program -Four essential steps: 1. Specify clearly the project or program, including its scale and the perspective of the study 2. Describe quantitatively the inputs and outputs of the program 3. Estimate the social costs and benefits of these inputs and outputs 4. Compare these benefits and costs Scale and Perspective of a BCA Project or Program -Two primary types of public environmental programs for which benefit-cost analyses are done: 1. Physical projects that involve direct public production, ex. Public waste treatment 2. Regulatory programs that are aimed at enforcing environmental laws and regulations, ex. Pollution control standards -Socially efficient scale – maximizes the net social benefits from the project. Net social benefits are maximized where MAC = MD -When the MAC and MD curves are not identifiable, a procedure called sensitivity analysis is undertaken – recalculating benefits and costs for programs somewhat larger and somewhat smaller than the target chosen -Benefit-cost analysis is an attempt to quantify the theoretical relationships that show the benefits of reducing emissions net of the costs of doing so Description of the Program’s Inputs and Outputs Measurement of Benefits and Costs of the Program Comparison of Benefits and Costs -Compute the net benefits of the project or program -Net benefits are the difference between total benefits and total cost. Total benefits are the total damages forgone (the area under the MD curve), and the total costs are the total abatement costs incurred (the area under the MAC curve). Maximizing the difference between total benefits and total costs corresponds to the point where MAC and MD curves intersect -If the project lasts more than a year, we must discount any future costs and benefits before computing net benefits -If there is more than one project that can accomplish the same target or goal, we select the program/project that yields the largest net benefits, subject to any budget constraints the government faces EC238 Chapter 6 – Framework of Analysis Week 5 -Sometimes the benefit-cost ratio is used which is found by taking the ratio or benefits and costs Discounting and Choosing among Projects that Achieve the Same Policy Goal 1. Calculate net benefits 2. Calculate the PV of net benefits for each year 3. Sum the present values of net benefits for each year to get the net benefits of each project over its expected duration Sensitivity Analysis -An important issue in cost-benefit analysis is how robust these results are t
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