Benefit cost analysis BCA of public policies

1
Benefit 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

2
BCA Perspective

• How far and wide are values to be counted?
• Local
• Regional
• National

3
BCA Local Perspective

• Only consider benefits and costs within the local
  governments jurisdiction
• Appropriate for funding by a local unit of
  government

4
BCA Local Perspective

• Should a project to clean up the New River
  funded by the City of Radford count as benefits
  values to non-residents?

5
BCA 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

6
BCA Perspective National

• Appropriate for funding by federal government

7
BCA 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.

8
BCA Quantitative measures

• Measures of inputs
• Control equipment
• Operation and maintenance
• Measures of outputs
• With project versus without project states
• Consideration of alternative policies

9
BCA 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

10
BCA 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

11
BCA 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

12
Comparing 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
13
Comparing benefits to costs
14
Comparing 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
15
Sensitivity 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