Title: Benefit cost analysis BCA of public policies
1Benefit cost analysis (BCA) of public policies
- Basic framework
- Perspective
- Program/Policy description
- Quantitative analysis of inputs and outputs
- Economic evaluation of inputs and outputs
- Comparison of benefits to costs
- Sensitivity analysis
2BCA Perspective
- How far and wide are values to be counted?
- Local
- Regional
- National
3BCA Local Perspective
- Only consider benefits and costs within the local
governments jurisdiction - Appropriate for funding by a local unit of
government
4BCA Local Perspective
- Should a project to clean up the New River
funded by the City of Radford count as benefits
values to non-residents?
5BCA Perspective Regional
- Appropriate when project is funded by one or more
states or more than one local unit of government - Example Chesapeake Bay Watershed Program
6BCA Perspective National
- Appropriate for funding by federal government
7BCA Perspective National
- Benefits to one region at the expense of another
would not be included since net national impact
is zero - Example improving water quality in a stream so
that opportunities for trout fishing increase has
no net national effect if trout fishers
substitute fishing in the stream for fishing
elsewhere. The total value of recreational
fishing stays the same.
8BCA Quantitative measures
- Measures of inputs
- Control equipment
- Operation and maintenance
- Measures of outputs
- With project versus without project states
- Consideration of alternative policies
9BCA Before and after analysis
- Road construction
- Average commute now 45 minutes
- Average commute after project - 35 minutes
- ? project saves 10 minutes on future commutes and
associated environmental costs
10BCA With versus without project analysis
- Road construction
- Average commute now 45 minutes
- Average future commute without project 50
minutes - Average future commute with project - 35 minutes
- ? project saves 15 minutes on future commutes and
associated environmental costs
11BCA Economic evaluation
- Assess costs of inputs
- Evaluate benefits of outputs
- Use market prices for outputs traded in
competitive markets - Use shadow, corrected prices for goods traded in
non-competitive markets - Use non-market evaluation techniques to monetize
non traded outputs - Discount all future costs and benefits
12Comparing benefits to costs
Determining feasibility Is the policy or program
worthwhile? Yes, if PVB/PVC gt 1 or
equivalently PVB- PVC gt 0 How do these measures
differ? The benefit cost ratio, PVB/PVC tell us
the benefits per dollar of costs The value of
PVB-PVC is a measure of the present value of net
benefits, PVNB
13Comparing benefits to costs
14Comparing benefits to costs
Selecting among feasible options To achieve
allocative efficiency maximize the present value
of net benefits, PVNB If information about
benefits is not available, pursue cost
effectiveness goal by minimizing the present
value of costs, PVC
15Sensitivity analysis
- Observe how results change with changes in
factors such as - Scope of project design
- Predictions about inflations effect on future
costs and benefits - Assumptions about responses to project
- Distribution of costs and benefits
- Discount rates